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DISCLAIMER 1. This document was prepared in connection with ESMA's field testing for the purposes of the development of a European Single Electronic Format ('ESEF') pursuant to ESMA's obligations under Article 4(7) of Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 as amended by Directive 2013/50/EU. 2. The purpose of the field testing is to assess the practicability of, and options for the further enhancement of, the draft specifications of ESEF under development by ESMA. The field testing has involved the participation of issuers in the transformation of their IFRS consolidated financial statements to Inline XBRL format. 3. When creating the Inline XBRL reports, only limited effort was made to style and design the human readable XHTML presentation layer as the focus of the field test lay on the transformation of the financial information to the machine readable XBRL format. XHTML allows significantly better designed reports, but such styling and presentation matters were not in the scope of the field test. 4. This published document is intended solely for the purposes of the field testing. In particular, ESMA publishes this material in order to inform the public of how ESEF will work and to provide the opportunity for feedback on matters relating to the development of ESEF. The published document should not be considered or used for any other purpose without the prior consent of ESMA and the issuer concerned. 5. Accordingly, the published material is not intended to provide investors or any other parties with information with regard to the issuer concerned or any transactions or other matters of a financial or any other nature. The material should not be relied upon for such purposes. 6. Neither ESMA nor the issuer whose financial information is included in this document in Inline XBRL format accept responsibility or liability with regard to the published material. Without prejudice to the generality of the foregoing, ESMA and the issuer concerned accept no responsibility or liability for any losses incurred in connection with any decision made or action or inaction on the part of any party in reliance upon the published material. 7. As the field test was, amongst others, used to determine how the ESEF draft specifications could be further improved, the final requirements for the European Single Electronic Format will differ from the draft rules that were applied to transform the issuer's financial statements to Inline XBRL. Therefore, the published material is not and may not be considered to provide guidance on or interpretation of any rules or regulations of any source whatsoever, including as regards compliance with Article 4(7) of Directive 2004/109/EC, and no party should infer from the published material or the manner of its presentation how financial statements, annual financial reports or regulated information should be prepared. 8. The Inline XBRL simplified display library that facilitates inspection of the tagging contained within the sample Inline XBRL documents is for demonstration purposes only. It was provided by XBRL International, Inc for strictly constrained purposes only and must not be relied upon. It remains under development and is subject to change. Users should be aware that there are a range of known limitations. Under no circumstances should any user rely on the output of the demonstration code for any purpose without the prior consent of ESMA and the issuer concerned.

Consolidated financial statements, IFRS
Consolidated income statement

EURm | NOTE | 2016 |  | 2015 |
Sales | 2.1, 2.2 | 9,812 |  | 10,138 |
Other operating income | 2.3 | 140 |  | 13 |
Costs and expenses | 2.3 | (8,365 | ) | (8,840 | )
Change in fair value of forest assets and wood harvested | 4.2 | 88 |  | 352 |
Share of results of associates and joint ventures |  | 5 |  | 3 |
Depreciation, amortisation and impairment charges | 2.3, 4.1, 4.4 | (545 | ) | (524 | )
Operating profit |  | 1,135 |  | 1,142 |
Gains on sale of energy shareholdings, net | 4.3 | 1 |  | — |
Exchange rate and fair value gains and losses | 5.4 | (7 | ) | 1 |
Interest and other finance costs | 5.4 | (49 | ) | (68 | )
Profit before tax |  | 1,080 |  | 1,075 |
Income taxes | 7.1 | (200 | ) | (159 | )
Profit for the period |  | 880 |  | 916 |
Attributable to: |  |  |
Owners of the parent company |  | 879 |  | 916 |
Non-controlling interests |  | 1 |  | — |
|  | 880 |  | 916 |
Earnings per share for profit attributable to owners of the parent company |  |  |
Basic earnings per share, EUR | 2.4 | 1.65 |  | 1.72 |
Diluted earnings per share, EUR | 2.4 | 1.65 |  | 1.72 |

Consolidated statement of comprehensive income

EURm | NOTE | 2016 | 2015
Profit for the period |  | 880 | 916
Other comprehensive income for the period, net of tax |  |  |
Items that will not be reclassified to the income statement: |  |  |
Actuarial gains and losses on defined benefit plans |  | (97) | 113
Items that may be reclassified to the income statement: |  |  |
Translation differences |  | (14) | 221
Net investment hedge |  | (1) | (28)
Cash flow hedges |  | 73 | 24
Gains and losses on energy shareholdings |  | (144) | (405)
|  | (87) | (188)
Other comprehensive income for the period, net of tax | 7.2 | (184) | (75)
Total comprehensive income for the period |  | 696 | 841
Attributable to: |  |  |
Owners of the parent company |  | 695 | 841
Non-controlling interests |  | 1 | —
|  | 696 | 841

The notes are integral part of these consolidated financial statements
Consolidated balance sheet

EURm | NOTE | 2016 |  | 2015 |
ASSETS |  |  |
Goodwill | 4.4 | 245 |  | 241 |
Other intangible assets | 4.4 | 301 |  | 329 |
Property, plant and equipment | 4.1 | 4,657 |  | 4,895 |
Forest assets | 4.2 | 1,734 |  | 1,738 |
Energy shareholdings | 4.3 | 1,932 |  | 2,085 |
Other non-current financial assets | 5.3 | 255 |  | 332 |
Deferred tax assets | 7.2 | 446 |  | 466 |
Net retirement benefit assets | 3.4 | 71 |  | 93 |
Investments in associates and joint ventures |  | 29 |  | 28 |
Other non-current assets |  | 47 |  | 52 |
Non-current assets |  | 9,715 |  | 10,259 |
Inventories | 4.6 | 1,346 |  | 1,376 |
Trade and other receivables | 4.6, 5.3 | 1,726 |  | 1,743 |
Other current financial assets | 5.3 | 109 |  | 133 |
Income tax receivables |  | 14 |  | 56 |
Cash and cash equivalents | 5.1 | 992 |  | 626 |
Current assets |  | 4,187 |  | 3,934 |
Assets classified as held for sale |  | 8 |  | — |
Assets |  | 13,911 |  | 14,193 |
EURm | NOTE | 2016 |  | 2015 |
EQUITY AND LIABILITIES |  |  |
Share capital | 5.5 | 890 |  | 890 |
Treasury shares |  | (2 | ) | (2 | )
Translation reserve |  | 433 |  | 449 |
Other reserves | 5.5 | 1,416 |  | 1,486 |
Reserve for invested non-restricted equity | 5.5 | 1,273 |  | 1,273 |
Retained earnings |  | 4,225 |  | 3,846 |
Equity attributable to owners of the parent company |  | 8,234 |  | 7,942 |
Non-controlling interests |  | 3 |  | 2 |
Equity |  | 8,237 |  | 7,944 |
Deferred tax liabilities | 7.2 | 457 |  | 456 |
Net retirement benefit liabilities | 3.4 | 817 |  | 747 |
Provisions | 4.5 | 145 |  | 154 |
Non-current debt | 5.2, 5.3 | 1,835 |  | 2,797 |
Other non-current financial liabilities | 5.3 | 110 |  | 174 |
Non-current liabilities |  | 3,364 |  | 4,328 |
Current debt | 5.2, 5.3 | 584 |  | 269 |
Trade and other payables | 4.6, 5.3 | 1,594 |  | 1,463 |
Other current financial liabilities | 5.3 | 116 |  | 156 |
Income tax payables |  | 16 |  | 33 |
Current liabilities |  | 2,309 |  | 1,921 |
Liabilities |  | 5,673 |  | 6,249 |
Equity and liabilities |  | 13,911 |  | 14,193 |
The notes are integral part of these consolidated financial statements |  |  |

Consolidated statement of changes in equity

|  |  |  |  | RESERVE |  |  | EQUITY |  |  |  |
|  |  |  |  | FOR |  |  | ATTRIBUTABLE |  |  |  |
|  |  |  |  | INVESTED |  |  | TO OWNERS |  | NON- |  |  |
|  |  |  |  | NON- |  |  | OF THE |  |  |
EURm | SHARE |  | TREASURY |  | TRANSLATION |  | OTHER |  | RESTRICTED |  | RETAINED |  | PARENT |  | CONTROLLING |  | TOTAL |  |
CAPITAL |  | SHARES |  | RESERVE |  | RESERVES |  | EQUITY |  | EARNINGS |  | COMPANY |  | INTERESTS |  | EQUITY |  |
Value, at 1 January 2016 | 890 |  | (2 | ) | 449 |  | 1,486 |  | 1,273 |  | 3,846 |  | 7,942 |  | 2 |  | 7,944 |  |

Profit for the period |  |  |  |  |  |  |  |  |  |  | 879 |  | 879 |  | 1 |  | 880 |  |
Translation differences |  |  |  |  | (14 | ) |  |  |  |  |  |  | (14 | ) |  |  | (14 | ) |
Cash flow hedges – |  |  |  |  |  |  |  |  |  |
reclassified to income |  |  |  |  |  |  |  |  |  |
statement, net of tax | – |  | – |  | – |  | 55 |  | – |  | – |  | 55 |  | – |  | 55 |  |
Cash flow hedges – changes |  |  |  |  |  |  |  |  |  |
in fair value, net of tax | – |  | – |  | – |  | 18 |  | – |  | – |  | 18 |  | – |  | 18 |  |
Net investment hedge, net of tax | – |  | – |  | (1 | ) | – |  | – |  | – |  | (1 | ) | – |  | (1 | ) |
Energy shareholdings – |  |  |  |  |  |  |  |  |  |
changes in fair value, net of tax | – |  | – |  | – |  | (144 | ) | – |  | – |  | (144 | ) | – |  | (144 | ) |
Actuarial gains and losses |  |  |  |  |  |  |  |  |  |
on defined benefit plans, net |  |  |  |  |  |  |  |  |  |
of tax | – |  | – |  | – |  | – |  | – |  | (97 | ) | (97 | ) | – |  | (97 | ) |
Total comprehensive income |  |  |  |  |  |  |  |  |  |
for the period | – |  | – |  | (16 | ) | (72 | ) | – |  | 782 |  | 695 |  | 1 |  | 696 |  |
Share-based payments, net of |  |  |  |  |  |  |  |  |  |
tax | – |  | – |  | – |  | 1 |  | – |  | (3 | ) | (2 | ) | – |  | (2 | ) |
Dividend distribution | – |  | – |  | – |  | – |  | – |  | (400 | ) | (400 | ) | – |  | (400 | ) |
Total transactions with |  |  |  |  |  |  |  |  |  |
owners for the period | – |  | – |  | – |  | 1 |  | – |  | (403 | ) | (402 | ) | – |  | (402 | ) |
Total equity at 31 December |  |  |  |  |  |  |  |  |  |
2016 | 890 |  | (2 | ) | 433 |  | 1,416 |  | 1,273 |  | 4,225 |  | 8,234 |  | 3 |  | 8,237 |  |
Value, at 1 January 2015 | 890 |  | (2 | ) | 256 |  | 1,867 |  | 1,273 |  | 3,194 |  | 7,478 |  | 2 |  | 7,480 |  |
Profit for the period | – |  | – |  | – |  | – |  | – |  | 916 |  | 916 |  | – |  | 916 |  |
Translation differences | – |  | – |  | 221 |  | – |  | – |  | – |  | 221 |  | – |  | 221 |  |
Cash flow hedges – |  |  |  |  |  |  |  |  |  |
reclassified to income |  |  |  |  |  |  |  |  |  |
statement, net of tax | – |  | – |  | – |  | 92 |  | – |  | – |  | 92 |  | – |  | 92 |  |
Cash flow hedges – changes |  |  |  |  |  |  |  |  |  |
in fair value, net of tax | – |  | – |  | – |  | (68 | ) | – |  | – |  | (68 | ) | – |  | (68 | ) |
Net investment hedge, net of |  |  |  |  |  |  |  |  |  |
tax | – |  | – |  | (28 | ) | – |  | – |  | – |  | (28 | ) | – |  | (28 | ) |
Energy shareholdings – |  |  |  |  |  |  |  |  |  |
changes in fair value, net of tax | – |  | – |  | – |  | (405 | ) | – |  | – |  | (405 | ) | – |  | (405 | ) |

Actuarial gains and losses on defined benefit plans, net of tax | – |  | – |  | – |  | – |  | – |  | 113 |  | 113 |  | – |  | 113 |  |
Total comprehensive income |  |  |  |  |  |  |  |  |  |
for the period | – |  | – |  | 193 |  | (381 | ) | – |  | 1,029 |  | 841 |  | – |  | 841 |  |
Share-based payments, net of |  |  |  |  |  |  |  |  |  |
tax | – |  | – |  | – |  | – |  | – |  | (4 | ) | (4 | ) | – |  | (4 | ) |
Dividend distribution | – |  | – |  | – |  | – |  | – |  | (373 | ) | (373 | ) |  | (373 | ) |
Total transactions with |  |  |  |  |  |  |  |  |  |
owners for the period | – |  | – |  | – |  | – |  | – |  | (377 | ) | (377 | ) | – |  | (377 | ) |
Total equity at 31 December |  |  |  |  |  |  |  |  |  |
2015 | 890 |  | (2 | ) | 449 |  | 1,486 |  | 1,273 |  | 3,846 |  | 7,942 |  | 2 |  | 7,944 |  |

• | Refer Note 5.5 Share capital and reserves, for further information.

Consolidated cash flow statement

EURm | 2016 |  | 2015 |
Cash flows from operating activities |  |
Profit for the period | 880 |  | 916 |
Adjustments 1) | 778 |  | 449 |
Interest received | 6 |  | 6 |
Interest paid | (40 | ) | (22 | )
Dividends received | 4 |  | 1 |
Other financial items, net | 8 |  | (17 | )
Income taxes paid | (145 | ) | (140 | )
Change in working capital 2) | 195 |  | (8 | )
Operating cash flow | 1,686 |  | 1,185 |
Cash flows from investing activities |  |
Capital expenditure | (351 | ) | (432 | )
Acquisition of shares in associates and joint ventures |  |  | (1 | )
Acquisition of energy shareholdings |  |  | (33 | )
Proceeds from sale of property, plant and equipment and intangible assets | 93 |  | 26 |
Proceeds from disposal of subsidiaries |  |  | 8 |
Proceeds from disposal of energy shareholdings | 6 |  | 35 |
Net cash flows from net investment hedges | (8 | ) | (43 | )
Change in other non-current assets | (2 | ) | 5 |
Investing cash flow | (262 | ) | (435 | )
Cash flows from financing activities |  |
Proceeds from non-current debt | 1 |  | 22 |
Payments of non-current debt | (540 | ) | (519 | )
Change in current liabilities | (77 | ) | 22 |
Net cash flows from derivatives | (22 | ) | 43 |
Dividends paid | (400 | ) | (373 | )
Other financing cash flow | (19 | ) | (20 | )
Financing cash flow | (1,057 | ) | (825 | )
Change in cash and cash equivalents | 367 |  | (75 | )
Cash and cash equivalents at beginning of period | 626 |  | 700 |
Exchange rate effect on cash and cash equivalents | (1 | ) | 1 |
Change in cash and cash equivalents | 367 |  | (75 | )
Cash and cash equivalents at end of period | 992 |  | 626 |
1) Adjustments |  |
EURm | 2016 |  | 2015 |
Change in fair value of forest assets and wood harvested | (88 | ) | (352 | )
Share of results of associates and joint ventures | (5 | ) | (3 | )
Depreciation, amortisation and impairment charges | 545 |  | 524 |
Capital gains and losses on sale of non-current assets | (55 | ) | (18 | )
Financial income and expenses | 56 |  | 67 |
Income taxes | 200 |  | 159 |
Utilised provisions | (47 | ) | (68 | )
Non-cash changes in provisions | 44 |  | 6 |
Other adjustments | 128 |  | 134 |
Total | 778 |  | 449 |

2) | Change in working capital

EURm | 2016 | 2015 |
Inventories | 41 | 15 |
Current receivables | 22 | (30 | )
Current liabilities | 132 | 7 |
Total | 195 | (8 | )

Notes to the consolidated financial statements
The notes to the consolidated financial statements are grouped into sections based on their nature. The notes contain the relevant financial information as well as a description of accounting policy and key estimates and judgements applied for the topics of the individual notes. All amounts are shown in millions of euros unless otherwise stated.

1. | Basis for reporting

1.1 Corporate information
UPM-Kymmene Corporation (“the parent company” or “the company”) together with its consolidated subsidiaries (“UPM” or “thegroup”) is a global forest industry group. UPM large product range covers pulp, graphic and specialty papers, self-adhesive labels, wood-based renewable diesel, electricity as well as plywood and timber products.
UPM-Kymmene Corporation is a Finnish limited liability company, domiciled in Helsinki in the Republic of Finland. The address of the company’s registered office is Alvar Aallon katu 1, 00100 Helsinki, where a copy of the consolidated financial statements can be obtained.
The parent company’s shares are publicly traded on the Nasdaq Helsinki Main Market.
These group consolidated financial statements were authorised for issue by the Board of Directors on 31 January 2017. According to the Finnish Companies Act, the General Meeting of Shareholders is entitled to decide on the adoption of the company’s financial statements.
1.2 Basis of preparation
UPM’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU) and IFRIC Interpretations.
The consolidated financial statements have been prepared under the historical cost convention, except for forest assets, energy shareholdings and certain other financial assets and financial liabilities, defined benefit plan assets and obligations and share-based payment arrangements which are measured at fair value.
The consolidated financial statements are presented in millions of euros, which is the functional and presentation currency of the parent company. Items included in the financial statements of each group subsidiary are measured using the currency of the primary economic environment in which the subsidiary operates (“the functional currency”).
The amounts within parentheses refer to the preceding year, 2015. Figures presented in these financial statements are rounded and therefore the sum of individual figures might deviate from the presented total figure.
Accounting policies
The accounting policies applied to the consolidated financial statements as a whole are described in this section, while the remaining accounting policies are described in the notes to which they relate as UPM aims to provide enhanced understanding of each financial statement area. Further, to provide a better understanding, the accounting choices made within the framework of the prevailing IFRS are described together with the policy.
Key estimates and judgements
In the process of applying the group’s accounting policies, management has made a number of judgements and applied estimates of future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Although these estimates are based on management’s best knowledge, actual results and timing may ultimately differ from previously made estimates.
Key estimates and judgement which are material to the reported results and financial position are presented in the following notes:

KEY ESTIMATES AND JUDGEMENTS NOTE | NOTE
Valuation of forest assets | 4.2 Forest assets
Fair value determination of energy shareholdings | 4.3 Energy shareholdings
Impairment of property, plant and equipment | 4.1 Property, plant and equipment
Impairment of goodwill and other intangible assets | 4.4 Goodwill and other intangible assets
Pension and other post-employment benefits | 3.4 Retirement benefit obligations
Income taxes | 7. Income tax
Environmental provisions | 4.5 Provisions
Legal contingencies | 9.2 Litigation

Financial risks
UPM is exposed to a variety of financial risks as a result of its business activities including currency risk, interest rate risk, commodity price risk, credit risk, capital risk and liquidity risk. Risk management related to financial activities is carried out by UPM’s central treasury department, Treasury and Risk Management, under policies approved by the Board of Directors. Financial risks are described in the relevant notes as described below.

FINANCIAL RISK |  | NOTE
Credit risk |  | 4.6 Working capital
Liquidity and refinancing risk |  | 5.1 Capital management
Interest rate risk |  | 6.1 Financial risk management
Foreign exchange risk |  | 6.1 Financial risk management
Electricity price risk |  | 6.1 Financial risk management
Financial counterparty risk |  | 6.2 Derivatives and hedge accounting

1.3 Consolidation principles
Subsidiaries
UPM’s consolidated financial statements include the financial statements of the parent company, UPM-Kymmene Corporation, and subsidiaries controlled by UPM. All group entities apply consistently UPM’s accounting policies. All intercompany transactions, receivables, liabilities and unrealised profits, as well as intragroup profit distributions, are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset.
Joint operations
UPM’s share in joint operations is recognised in the consolidated balance sheet through recognition of the group’s own assets and liabilities and revenues and expenses in the arrangement together with UPM’s proportionate share in the joint assets, liabilities and joint income and expenses. The proportionate share of realised and unrealised gains and losses arising from intragroup transactions between UPM and its joint operations is eliminated.
Associates and joint ventures
Associates are entities over which the group has significant influence. Joint ventures are joint arrangements where the group has joint control with other parties and the parties have rights to the arrangement’s net assets.
Interests in associates and joint ventures are accounted for using the equity method of accounting and are initially recognised at cost.
Associates and joint ventures follow the group accounting policies for consolidation purpose.
Non-controlling interests
The profit or loss attributable to owners of the parent company and non-controlling interests is presented on the face of the income statement. Non-controlling interests are presented in the consolidated balance sheet within equity, separately from equity attributable to owners of the parent company.
Transactions with non-controlling interests are treated as transactions with equity owners of the group. For purchases from non-controlling interests, the difference between consideration paid and the acquired share of the carrying value of the subsidiary’s net assets is recorded in equity. Gains or losses of disposals to non-controlling interests are also recorded in equity, net of transaction costs.
1.4 Foreign currency translation
Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
UPM records foreign exchange differences relating to ordinary business operations within the appropriate line items above operating profit and those relating to financial items are presented separately as a net amount in finance costs.
Income and expenses of subsidiaries that have a functional currency different from euro are translated into euros at quarterly average exchange rates. Assets and liabilities of subsidiaries are translated at the closing rate at the balance sheet date. All resulting translation differences are recognised as a separate component in other comprehensive income. On consolidation, exchange differences arising from the translation of net investment in foreign operations and other currency instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign entity is partially disposed of, sold or liquidated, translation differences accrued in equity are recognised in the income statement as part of the gain or loss on sale/liquidation.
1.5 New standards and amendments adopted
The following amendments to existing standards that are relevant to group have been adopted on January 2016:

STANDARD | NATURE OF CHANGE | IMPACT | DATE OF ADOPTION
Amendment to IAS 7 Statement of Cash Flows | The amendment requires to explain changes in liabilities arising from financing activities. | The group has early adopted the amendments made to IAS 7 and revised its net debt disclosures to comply with new requirements. | 1 January 2016
Amendment to IAS 1 Presentation of financial statements | Part of IASB “Disclosure initiative” to improve presentation and disclosures in financial reports. The amendment provides prepares with more flexibility in presenting the information in financial reports | The group has reviewed the content and structure of the financial statements in order to provide users with a clearer understanding of what drives financial performance. Immaterial disclosures that may undermine the usefulness of the financial reports have been removed and the notes to the financial statements have been reorganised into sections to assist users in understanding the group performance. | 1 January 2016
Annual improvements to IFRSs 2012–2014 cycle | The amendments primarily remove inconsistencies, provide additional guidance and clarify wording of standards. | The adoption of improvements did not have any impact on the group’s financial statements. | 1 January 2016

2. | Business performance

Sales | Comparable EBIT | Comparable ROE |
EUR 9,812m | EUR 1,143m | 10.9% |
(EUR 10,138m) | (EUR 916m) | (9.50)% |

2.1 Business areas
UPM business portfolio consist of six competitive businesses with strong market positions. UPM reports financial information for the following business areas (segments): UPM Biorefining, UPM Energy, UPM Raflatac, UPM Specialty Papers, UPM Paper ENA, UPM Plywood and Other operations. UPM has production plants in 12 countries. The group’s most important markets are Europe, North America and Asia.
Accounting policies
UPM business areas are reported consistently with the internal reporting provided to UPM’s President and CEO who is responsible for allocating resources and assessing performance of the business areas. Internal reporting is prepared under the same basis as the consolidated accounts, except for a joint operation, Madison Paper Industries (MPI) which is consolidated as a subsidiary in the UPM Paper ENA reporting. Costs, revenues, assets and liabilities are allocated to business areas on a consistent basis. The sales transactions between business areas are based on market prices, and they are eliminated on consolidation.

BUSINESS AREA | DESCRIPTION AND PRODUCTS
UPM Biorefining | UPM Biorefining consists of UPM Pulp, UPM Biofuels and UPM Timber business units. UPM has three pulp mills in Finland, one pulp mill and plantation operations in Uruguay, four saw mills in Finland and one biorefinery in Finland. UPM Pulp serves the global market with a comprehensive assortment of sustainably produced eucalyptus, birch and softwood pulp grades for a variety of tissue, specialty paper, board, printing and writing paper and other applications. UPM Biofuels produces innovative, advanced biofuels for transport. UPM Timber manufactures certified sawn timber from Nordic pine and spruce to joinery, packaging, distribution and construction industries.
UPM Energy | UPM Energy produces low emission electricity to the Nordic market. UPM Energy is the second largest electricity producer in Finland. UPM Energy operations include electricity generation, and operations in both physical electricity and financial portfolio management. UPM Energy assets consists of hydro power assets in Finland and shareholdings in energy companies.
UPM Raflatac | UPM Raflatac is one of the world’s leading producers of self-adhesive label materials. UPM Raflatac supplies high-quality film and paper label stock for consumer product and industrial labelling.
UPM Paper ENA | UPM Paper ENA (Europe & North America) is the world’s leading producer of graphic papers.
UPM Plywood | UPM Plywood manufactures high-quality plywood and veneer products mainly for construction and transport industries and the new thermo-formable wood material for the form pressing industry. Production facilities are located in Finland, Estonia and Russia.
UPM Specialty Papers 1) | UPM Specialty Papers produces fine papers to Asian markets and label and packaging materials to global markets. Responsibly produced high performance papers are manufactured in China and Finland.
Other operations | Other operations include wood sourcing and forestry, UPM Biocomposites, UPM Biochemicals business units and group services. Wood sourcing operations source wood raw material for sustainable and recyclable UPM products. UPM Biocomposites combines cellulose fibres and polymers into new high-performance products and materials. UPM Biochemicals wood-based biochemicals offer truly sustainable, competitive and high-quality solutions for various industries and applications.

1) | In 2016, UPM Paper Asia business area has been renamed UPM Specialty Papers. The new name highlights the business area’s strategic focus on specialty papers and global operations.

Key performance indicators and financial targets
UPM targets top performance at the business area level in their respective markets. Financial target setting, follow up and allocation of resources in the group’s performance management process is mainly based on the business areas’ comparable EBIT and comparable ROCE.
UPM presents comparable performance measures to reflect the underlying business performance and to enhance comparability from period to period. However the comparable performance measures used by management should not be considered in isolation as a substitute for measures of performance in accordance with IFRS. Business area information including description of items affecting comparability is presented below.
Business area information for the year ended 31 December 2016

|  |  |  | UPM | UPM |  |  | ELIMINATIONS |
| UPM | UPM | UPM | SPECIALTY | PAPER | UPM | OTHER | AND RECONCI- |
EURm, OR AS INDICATED | BIOREFINING | ENERGY | RAFLATAC | PAPERS | ENA | PLYWOOD | OPERATIONS | LIATIONS 2) | GROUP
External sales | 1,663 | 170 | 1,437 | 1,067 | 4,797 | 424 | 275 | –22 | 9,812
Internal sales | 542 | 187 | – | 206 | 21 | 20 | 11 | –987 | –
Total sales | 2,206 | 357 | 1,437 | 1,273 | 4,818 | 444 | 285 | –1,009 | 9,812
Comparable EBIT | 406 | 116 | 133 | 123 | 280 | 58 | 14 | 12 | 1,143
Items affecting comparability in |  |  |  |  |  |  |  |  |
operating profit | – | – | – | – | –57 | – | 1 | 48 | –7
Operating profit | 406 | 116 | 134 | 123 | 223 | 58 | 15 | 60 | 1,135
Finance costs, net |  |  |  |  |  |  |  |  | –56
Income taxes |  |  |  |  |  |  |  |  | –200
Profit for the period |  |  |  |  |  |  |  |  | 880
Operating assets 1) | 3,586 | 2,283 | 666 | 1,121 | 2,287 | 304 | 1,691 | –326 | 11,612
Deferred tax assets |  |  |  |  |  |  |  |  | 446
Other non-operating assets |  |  |  |  |  |  |  |  | 132
Other financial assets |  |  |  |  |  |  |  |  | 1,721
Total assets |  |  |  |  |  |  |  |  | 13,911
Operating liabilities 1) | 245 | 34 | 165 | 137 | 505 | 43 | 179 | –295 | 1,013
Deferred tax liabilities |  |  |  |  |  |  |  |  | 457
Other liabilities |  |  |  |  |  |  |  |  | 978
Other financial liabilities |  |  |  |  |  |  |  |  | 3,226
Total liabilities |  |  |  |  |  |  |  |  | 5,673
Other items |  |  |  |  |  |  |  |  |
Change in fair value of forest |  |  |  |  |  |  |  |  |
assets and wood harvested | 29 | – | – | – | – | – | 59 | – | 88
Share of results of associates and |  |  |  |  |  |  |  |  |
joint ventures | 2 | –1 | – | – | 2 | – | 3 | – | 5
Depreciation and amortisation | –171 | –9 | –33 | –91 | –164 | –22 | –13 | 1 | –503
Impairment charges | –1 | – | – | – | –49 | – | – | 10 | –41
Capital employed, 31 December | 3,341 | 2,249 | 501 | 984 | 1,782 | 261 | 1,512 | 27 | 10,657
Average capital employed | 3,231 | 2,340 | 524 | 1,012 | 1,964 | 259 | 1,541 | –36 | 10,833
Capital expenditure | 188 | 1 | 19 | 15 | 49 | 45 | 9 | –1 | 325
Capital expenditure, excluding |  |  |  |  |  |  |  |  |
acquisitions and shares | 188 | 1 | 19 | 15 | 49 | 45 | 9 | –1 | 325
Comparable ROCE, % | 12.6 | 5.0 | 25.5 | 12.1 | 14.3 | 22.6 | 0.9 | – | 10.6
Personnel, 31 December | 2,630 | 71 | 3,062 | 1,984 | 8,664 | 2,469 | 442 | –12 | 19,310

1) | Business area’s operating assets include goodwill, other intangible assets, property, plant and equipment, forest assets, energy shareholdings, investments in associates and joint-ventures, inventories and trade receivables. Operating liabilities include trade payables and advances received.

2) | Eliminations and reconciliations include the elimination of internal sales and internal inventory margin and the consolidation of MPI as a joint operation. In addition the changes in fair value of unrealised cash flow and commodity hedges that are not allocated to segments are included in reconciliations.

In 2016, UPM has relabeled the previously referenced “excluding special items” non-GAAP financial measures with “comparable” performance measures as published in » UPM’s stock exchange release on 14 April 2016.
• Refer Note 10.2 , Alternative performance measures, for definitions of key figures and reconciliation to measures presented in the consolidated income statement and balance sheet prepared in accordance with IFRS.
Business area information for the year ended 31 December 2015

|  |  |  | UPM | UPM |  |  | ELIMINATIONS |
| UPM | UPM | UPM | SPECIALTY | PAPER | UPM | OTHER | AND RECONCI- |
EURm, OR AS INDICATED | BIOREFINING | ENERGY | RAFLATAC | PAPERS | ENA | PLYWOOD | OPERATIONS | LIATIONS 2) | GROUP
External sales | 1,668 | 237 | 1,409 | 962 | 5,036 | 418 | 403 | 5 | 10,138
Internal sales | 604 | 178 | – | 206 | 20 | 21 | 3 | –1,032 | –
Total sales | 2,272 | 415 | 1,409 | 1,168 | 5,056 | 439 | 406 | –1,027 | 10,138
Comparable EBIT | 467 | 181 | 102 | 55 | 24 | 55 | 38 | –6 | 916
Items affecting comparability in |  |  |  |  |  |  |  |  |
operating profit | –1 | –26 | –3 | – | 8 | –2 | 268 | –18 | 226
Operating profit | 466 | 155 | 99 | 55 | 32 | 53 | 306 | –24 | 1,142
Finance costs, net |  |  |  |  |  |  |  |  | –67
Income taxes |  |  |  |  |  |  |  |  | –159
Profit for the period |  |  |  |  |  |  |  |  | 916
Operating assets 1) | 3,384 | 2,425 | 697 | 1,200 | 2,637 | 284 | 1,720 | –218 | 12,129
Deferred tax assets |  |  |  |  |  |  |  |  | 466
Other non-operating assets |  |  |  |  |  |  |  |  | 200
Other financial assets |  |  |  |  |  |  |  |  | 1,398
Total assets |  |  |  |  |  |  |  |  | 14,193
Operating liabilities 1) | 197 | 12 | 140 | 141 | 435 | 31 | 145 | –164 | 937
Deferred tax liabilities |  |  |  |  |  |  |  |  | 456
Other liabilities |  |  |  |  |  |  |  |  | 935
Other financial liabilities |  |  |  |  |  |  |  |  | 3,921
Total liabilities |  |  |  |  |  |  |  |  | 6,249
Other items |  |  |  |  |  |  |  |  |
Change in fair value of forest |  |  |  |  |  |  |  |  |
assets and wood harvested | 21 | – | – | – | – | – | 331 | – | 352
Share of results of associates and |  |  |  |  |  |  |  |  |
joint ventures | 1 | – | – | – | 1 | – | 1 | – | 3
Depreciation and amortisation | –169 | –11 | –35 | –86 | –190 | –23 | –13 | 3 | –524
Impairment charges | – | – | – | – | – | – | – | – | –
Capital employed, 31 December | 3,187 | 2,413 | 557 | 1,059 | 2,202 | 253 | 1,575 | –236 | 11,010
Average capital employed | 3,191 | 2,716 | 581 | 1,012 | 2,289 | 263 | 1,483 | –558 | 10,977
Capital expenditure | 161 | 35 | 22 | 211 | 57 | 23 | 11 | – | 520
Capital expenditure, excluding |  |  |  |  |  |  |  |  |
acquisitions and shares | 159 | 3 | 22 | 211 | 57 | 23 | 11 | – | 486
Comparable ROCE, % | 14.6 | 6.7 | 17.6 | 5.4 | 1.0 | 20.9 | 2.6 | – | 8.3
Personnel, 31 December | 2,593 | 73 | 2,894 | 1,738 | 9,472 | 2,469 | 443 | –104 | 19,578

1) | Business area’s operating assets include goodwill, other intangible assets, property, plant and equipment, forest assets, energy shareholdings, investments in associates and joint-ventures, inventories and trade receivables. Operating liabilities include trade payables and advances received.

2) | Eliminations and reconciliations include the elimination of internal sales and internal inventory margin and the consolidation of MPI as a joint operation. In addition the changes in fair value of unrealised cash flow and commodity hedges that are not allocated to segments are included in reconciliations.

In 2016, UPM has relabeled the previously referenced “excluding special items” non-GAAP financial measures with “comparable” performance measures as published in » UPM’s stock exchange release on 14 April 2016.
• Refer Note 10.2 , Alternative performance measures, for definitions of key figures and reconciliation to measures presented in the consolidated income statement and balance sheet prepared in accordance with IFRS.
Items affecting comparability

EURm | 2016 | 2015
In operating profit: |  |
Impairment charges | –35 | –
Restructuring charges | –48 | –5
Change in fair value of unrealised cash flow and commodity hedges | 27 | –18
Capital gains on sale of non-current assets | 49 | 6
Fair value changes of forest assets resulting from changes in estimates | – | 265
Other non-operational items | – | –22
Total | –7 | 226
In finance costs: |  |
Losses on sale of associates and joint ventures | –2 | –
Total | –2 | –
Total in profit before tax | –9 | 226
In income taxes: |  |
Taxes related to items affecting comparability | 7 | –44
Changes in tax rates | 4 | –
Total | 11 | –44
Total in profit for the period | 1 | 182

In 2016, items affecting in comparability in operating profit include impairment charges of EUR 11 million relating to Madison mill closure, EUR 23 million relating to planned closure of Steyrermühl paper machine 3 and EUR 1 million relating to planned closure of Augsburg paper machine 2. Restructuring charges reported as items affecting comparability include EUR 13 million relating to Madison mill closure, EUR 22 million relating to planned closure of Steyrermühl paper machine 3, EUR 18 million relating to planned closure of Augsburg paper machine 2 and income of EUR 5 million relating to reversals of restructuring provisions of prior capacity closures. Capital gains affecting the comparability comprise of a gain of EUR 47 million relating to sale of Schwedt mill assets and EUR 2 million relating to sale of other assets. In 2015, fair value increase of forest assets in Finland totalling EUR 265 million, due to adjusted long-term wood price estimates and a change in the discount rate, is reported in items affecting comparability. Other non-operational items affecting comparability include EUR 19 million project expenses of Olkiluoto 4 nuclear power plant and EUR 3 million other expenses. Capital gains affecting the comparability comprise of a gain of EUR 3 million relating to the sale of Tilhill Forestry Ltd shares and EUR 3 million relating to the sale of other assets.

Sales by country |  |
EURm | 2016 | 2015
Finland | 886 | 900
Germany | 1,699 | 1,658
United States | 1,217 | 1,253
United Kingdom | 715 | 916
China | 860 | 852
France | 434 | 421
Uruguay | 48 | 61
Other EU countries | 2,099 | 2,103
Other European countries | 383 | 436
Rest of world | 1,472 | 1,538
Total | 9,812 | 10,138

Total assets and capital expenditure by country
| Assets | Capital expenditure
EURm | 2016 | 2015 | 2016 | 2015
Finland | 8,566 | 8,524 | 157 | 218
Germany | 1,008 | 1,148 | 18 | 20
United States | 437 | 491 | 3 | 5
United Kingdom | 185 | 211 | 8 | 8
China | 879 | 1,037 | 13 | 215
France | 71 | 63 | 3 | 2
Uruguay | 2,01 | 2,004 | 84 | 26
Other EU countries | 325 | 325 | 33 | 22
Other European countries | 91 | 71 | 5 | 2
Rest of world | 340 | 319 | 1 | 2
Total | 13,911 | 14,193 | 325 | 520

2.2 Sales
UPM generates revenue mainly from the sale of several types of products.
UPM sells a proportion of its products to several major customers. The largest customer in terms of sales represented approximately 3% of UPM’s sales in 2016 and 2015, and the ten largest customers represented approximately 16% (15%) of such sales.» Refer Note 2.1 Business areas for information on UPM products.
Sales by business area

EURm | 2016 | 2015 | Change |
UPM Biorefining | 2,206 | 2,272 | –3% |
UPM Energy | 357 | 415 | –14% |
UPM Raflatac | 1,437 | 1,409 | 2 | %
UPM Specialty Papers | 1,273 | 1,168 | 9 | %
UPM Paper ENA | 4,818 | 5,056 | –5% |
UPM Plywood | 444 | 439 | 1 | %
Other operations | 285 | 406 | –30% |
Eliminations | –1,009 | –1,027 | – |
Total | 9,812 | 10,138 | –3% |

The biggest factor affecting UPM’s financial results is the sales price of paper. A change in the volume delivered has less than half of the effect of the same percentage change in sale prices.
Effect of a 10% change in prices on operating profit for the year

EURm | 2016 | 2015
Papers in UPM Paper ENA | 471 | 501
Fine and specialty papers in UPM Specialty |  |
Papers | 106 | 97
Label materials in UPM Raflatac | 144 | 141
Plywood | 41 | 41
Sawn timber | 30 | 30
Chemical pulp (net effect) | 33 | 21

Accounting policies
Revenue from UPM’s product sales is recognised when the customer takes title and assumes the risks and rewards of ownership. The timing of revenue recognition is largely dependent on delivery terms. Group terms of delivery are based on Incoterms 2010, the official rules for interpretation of trade terms issued by the International Chamber of Commerce. Revenue is recorded when the product is delivered to the destination point for terms designated Delivered Duty Paid (“DDP”) or Delivered at Place (“DAP”). For sales transactions designated Free on Carrier (“FCA”), Carriage paid to (“CPT”) or Carriage and Insurance Paid to (“CIP”), revenue is recorded at the time of shipment.
UPM sells energy to NordPool electricity market. Revenue is recognised when electricity is transmissed.
UPM provides forest expertise and contracting services to woodland and forestry owners. Revenues from services are recorded when the service has been performed.
Sales are recognised net of indirect sales taxes, discounts, rebates and cash flow hedging results of sales in foreign currency as well as hedges of energy sales.
2.3 Operating expenses and other operating income
Operating expenses
Operating expenses excluding forest assets fair value change, wood harvested and share of results of associates and joint ventures are presented below.

EURm | 2016 | 2015
Costs and expenses |  |
Raw materials, consumables and goods | 5,376 | 5,784
Employee costs 1) | 1,246 | 1,257
Other operating costs and expenses 2) | 884 | 943
Delivery costs and other external charges | 859 | 856
Total | 8,365 | 8,840

1) | » Refer Note 3. Employee rewards, for further information.

2) | Distribution of other operating costs and expenses

EURm | 2016 | 2015
Rents and lease expenses | 48 | 51
Emission expenses | 9 | 14
Losses on sale of non-current assets | 3 | 2
Credit losses | 10 | 18
Maintenance and other operating expenses 1) | 815 | 858
Total | 884 | 943

1) | Other operating expenses include, among others, energy as well as expenses related to services and group’s administration.

Auditor's fees

EURm | 2016 | 2015
Audit services | 2.3 | 2.3
Tax consulting | 0.7 | 0.8
Other services | 0.6 | 0.5
Total | 3.6 | 3.6

Research and development costs
The research and development costs included in operating expenses were EUR 40 million (37 million) in 2016. The focus was on new technologies and developing businesses.
Government grants
In 2016, government grants recognised as deduction of operating expenses totalled to EUR 8 million (6 million) of which EUR 6 million (6 million) relates to Finland, EUR 2 million (0 million) to UK and China. In addition, the group received emission rights from governments amounting to EUR 16 million (22 million) of which EUR 8 million (9 million) relates to Finland, EUR 6 million (9 million) to Germany, EUR 1 million (1 million) to Austria, EUR 1 million (2 million) to UK and EUR 0 million (1 million) to France.
Other operating income

EURm | 2016 | 2015
Gains on sale of non-current assets | 59 | 20
Rental income | 16 | 15
Emission rights received | 16 | 22
Derivatives, non-qualifying hedges | 28 | –78
Exchange rate gains and losses | 6 | 18
Other | 16 | 16
Total | 140 | 13

In 2016, gains on sale of non-current assets includes EUR 47 million related to sale of Schwedt mill assets.
Emission rights
The group has recognised in Other operating income of EUR 16 million (22 million) income and under Other operating costs and expenses of EUR 9 million (14 million) expenses relating to CO 2 emissions. The liability to cover the obligation to return emission rights amounted to EUR 9 million (14 million) and is recognised in provisions. The emission rights recognised in intangible assets are specified below.

EURm | 2016 | 2015
Carrying value, at 1 January | 52 | 43
Emission rights received and purchased | 14 | 24
Deliveries and disposals | –14 | –15
Impairment | –7 | –
Translation differences | –1 | –
Carrying value, at 31 December | 45 | 52
Accumulated costs | 52 | 54
Accumulated impairments | –7 | –2
Carrying value, at 31 December | 45 | 52

Accounting policies
Research and development costs
Research and development costs are expensed as incurred, except for certain development costs, which are capitalised as they generate future economic benefits, and UPM can the measure the cost reliably. Capitalised development costs are amortised on a systematic basis over their expected useful lives, usually not exceeding five years.
Government grants
Government grants are recognised at fair value where there is a reasonable assurance that the grant will be received and the group will comply with the attached conditions. Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset and accordingly directly reduce the annual depreciation of the underlying asset. Other government grants are recognised in the income statement in the period necessary to match them with the costs they are intended to compensate.
Other operating income
Other operating income mainly includes gains on the disposal of non-current assets and rental income. Further, other operating income includes foreign exchange gains and losses in respect of UPM’s normal business activities. Gains and losses on derivatives not qualifying hedge accounting are also recognised in other operating income.
Emission rights
The group participates in the European Emissions Trading Scheme aimed at reducing greenhouse gas emissions. Emission rights received from governments free of charge to emit a fixed tonnage of carbon dioxide in a fixed period of time give rise to an intangible asset for the emission rights, a government grant and a liability for the obligation to deliver emission rights equal to the emissions that have been made during the compliance period. Emission rights are initially recognised as intangible assets based on market value at the date of initial recognition. Emission rights are not amortised. If the market price of emissions rights at the balance sheet date is less than the recognised costs, any surplus emission rights that are not required to cover actual and estimated emissions during the financial year, are impaired to the market price.
Government grants are recognised as deferred income in the balance sheet at the same time as emission rights and are recognised in other operating income in the income statement, systematically, over the compliance period to which the corresponding emission rights relate.
The liability to deliver emission rights is recognised based on actual emissions. The emissions realised are expensed under other operating costs and expenses in the income statement and presented as a provision in the balance sheet. The liability is settled using emission rights on hand, measured at the carrying amount of those emission rights. Emission rights and associated provisions are derecognised when disposed. Any profit or loss represents the costs of purchasing additional rights to cover excess emissions, the sale of unused rights in the case realised emission are under emission rights received free of charge or the impairment of unused emission rights.
2.4 Earnings per share and dividend
According to UPM dividend policy approved by the Board of Directors in 2015, the company aims to pay an attractive dividend amounting to 30-40% of the group annual operating cash flow per share.
The dividend paid in 2016 were EUR 400 million (EUR 0.75 per share) which is 34% of the operating cash flow per share and in 2015 EUR 373 million (EUR 0.70 per share). The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 506.8 million, EUR 0.95 per share, will be paid in respect of 2016. The proposed dividend represents 30% of UPM’s operating cash flow per share for the year 2016.
Earnings per share

| 2016 | 2015
Profit attributable to owners of the parent |  |
company, EURm | 879 | 916
Weighted average no. of shares (1,000) | 533,505 | 533,505
Basic earnings per share, EUR | 1.65 | 1.72
Diluted earnings per share, EUR | 1.65 | 1.72

Accounting policies
Earnings per share
Earnings per share (EPS) is the amount of profit for the period attributable to each ordinary share. The basic earnings per share are computed using the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of shares outstanding during the period plus the dilutive effect of share options. The group did not have share-option schemes at the end of 2016 and 2015.
Dividend
Dividend distribution to the owners of the parent company is recognised as a liability in the group’s consolidated financial statements in the period in which the dividends are approved by the parent company’s shareholders.
3. Employee rewards
3.1 Employee costs

EURm | 2016 | 2015
Salaries and fees | 969 | 967
Share-based payments | 24 | 16
Pension and other post-employment benefits, defined benefit plans | 21 | 32
Pension costs, defined contribution plans | 107 | 117
Other indirect employee costs 1) | 124 | 125
Total | 1,246 | 1,257

1) | Other indirect employee expenses primarily include other statutory social expenses, excluding pension expenses.

3.2 Key management personnel
Remuneration policy
The Annual General Meeting 2016 decided to leave the Board remuneration unchanged. The Chairman of the Board receives an annual fee of EUR 175,000, Deputy Chairman of the Board and Chairman of the Audit Committee EUR 120,000 and other members of the Board EUR 95,000. No annual fee is paid to the President and CEO for his role as a member of the Board. The annual fee is settled partly in company’s shares and partly in cash so that 40% of the fee is paid in the company shares to be acquired on the Board members’ behalf, and the rest in cash. The company pays the costs and transfer tax payable related to the acquisition of the company shares.
In 2016, 4,235 (4,193) company shares were paid to the Chairman, 2,904 (2,875) shares to the Deputy Chairman and the Chairman of the Audit Committee respectively and 2,299 (2,276) shares to each of the other members of the Board.
Shareholdings (no. of shares) and fees of the Board of Directors

| Shareholdings 31 December | Fees (EUR 1,000)
| 2016 | 2015 | 2016 | 2015
Board members |  |  |  |
| 256,677 | 254,442 | 175 | 175
| 306,482 | 303,578 | 120 | 120
| 4,575 | 2,276 | 95 | 95
| 14,460 | 11,856 | 120 | 120
| 35,224 | 32,925 | 95 | 95
| 304,064 | 220,275 | – | –
| 6,600 | 4,301 | 95 | 95
| 38,396 | 36,097 | 95 | 95
| 4,575 | 2,276 | 95 | 95
| 16,374 | 14,075 | 95 | 95
Total | 987,427 | 882,101 | 985 | 985

Salaries, fees and other benefits to the President and CEO and the Group Executive Team

| President and CEO | Other members of group executive team 1)
EUR 1,000 | 2016 | 2015 | 2016 | 2015
Salaries | 1,049 | 1,052 | 3564 | 3,455
Incentives | 888 | 856 | 1779 | 1,733
Share rewards | 3,098 | 824 | 6269 | 1,805
Benefits | 30 | 27 | 231 | 238
Total | 5,065 | 2,759 | 11,843 | 7,231

1) | 11 members in 2016 and 2015.

In 2016, costs under the Finnish statutory pension scheme for the President and CEO amounted to EUR 370,000 (353,000) and payments under the voluntary pension plan were EUR 1,000,000 (1,000,000).
In 2016, costs under the Finnish and German statutory pension schemes for Group Executive Team (GET) members (excluding the President and CEO) amounted to EUR 881,000 (900,000) and costs under the voluntary pension plan were EUR 818,000 (651,000).
The total remuneration of the President and CEO and the members of the Group Executive Team consists of base salary and benefits, short-term incentives and long-term share-based incentives.
The short-term incentive plan for the President and CEO and the members of the Group Executive Team has been linked with achievement of the predetermined financial targets of the group or business areas and individual targets. The incentives amount to a total maximum of 100% of annual base salary to the business area executives and to a total maximum of 70% of annual base salary to the other members of the Group Executive Team. For the President and CEO the maximum annual incentive amounts to 150% of the annual base salary.
The expenses recognised in income statement in respect of share-based payments for the Group Executive Team were EUR 9.2 million (5.4 million).
In accordance with his service contract, the retirement age of the President and CEO , is 60. For the President and CEO, the target pension is 60% of the average indexed earnings from the last ten years of employment calculated according to the Finnish statutory pension scheme. The costs of lowering the retirement age to 60 is covered by supplementing the statutory pension with a voluntary defined benefit pension plan. Should the President and CEO leave the company before reaching the age of 60, an immediate vesting right corresponding to 100% of earned pension (pro rata) will be applied. The retirement age of the other members of the Group Executive Team is 63. The expenses of the President and CEO’s defined benefit pension plan in 2016 were EUR 0.5 million (0.6 million), and the plan assets amounted to EUR 2.6 million (1.6 million) and obligation to EUR 1.8 million (0.9 million). Other Group Executive Team members are under defined contribution plans.
In case the notice of termination is given to the President and CEO, a severance pay of 24 months' base salary will be paid in addition to the salary for six months' notice period. Should the President and CEO give a notice of termination to the company, no severance pay will be paid in addition to the salary for the notice period. For other members of the Group Executive Team, the period for additional severance pay is 12 months, in addition to the six months’ salary for the notice period, unless notice is given for reasons that are solely attributable to the executive.
If there is a change in the control over the company, the President and CEO may terminate his service contract within three months and each member of the Group Executive Team may terminate his/her service contract within one month from the date of the event that triggered the change of control and shall receive compensation equivalent to 24 months' base salary.
3.3 Share-based payments
UPM offers reward and recognition with an emphasis of high performance. All UPM’s employees belong to a unified annual Short Term Incentive (STI) scheme. In addition, UPM has two long-term incentive plans: the Performance Share Plan (PSP) for senior executives and the Deferred Bonus Plan (DBP) for other key employees .
Performance Share Plan
The Performance Share Plan (PSP) is targeted at Group Executive Team members and other selected members of the management. Under the ongoing plans the UPM shares are awarded based on the total shareholder return during a three-year earning period. The earned shares are delivered after the earning period has ended. Total shareholder return takes into account share price appreciation and paid dividends.

PERFORMANCE SHARE PLANS | PSP 2013-2015 |  | PSP 2014-2016 |  | PSP 2015-2017 | PSP 2016-2018
No. of participants at 31 December 2016 | 33 |  | 24 |  | 24 | 24
Actual achievement | 90.4 | % | 100 | % | – | –
Max no. of shares to be delivered 1) |  |  |  |
to the President and CEO | 197,976 |  | 116,785 |  | 125,000 | 112,500
to other members of GET | 397,760 |  | 352,689 |  | 380,000 | 360,000
to other key individuals | 402,280 |  | 280,284 |  | 295,000 | 263,000
Total max no. of shares to be delivered | 998,016 |  | 749,758 |  | 800,000 | 735,500
Share delivery (year) | 2016 |  | 2017 |  | 2018 | 2019
Earning criteria (weighting) | Operating cash |  | Total shareholder |  | Total shareholder | Total shareholder
| flow (60%) and |  | return (100%) |  | return (100%) | return (100%)
| EPS (40%) |  |  |  |

1) | For PSP 2013–2015 and PSP 2014–2016, the gross amount of the actual no. of shares earned.

Deferred Bonus Plan
The Deferred Bonus Plan (DBP) is targeted at other selected key employees of the group and it consists of annually commencing plans. Deferred Bonus Plan share incentives are based on achievement of group and /or business area EBITDA targets. Each plan consists of one-year earning period and a two-year restriction period. Prior to share delivery, the share rewards earned are adjusted with dividends and other capital distributions, if any, paid to all shareholders during the restriction period. The indicated actuals and estimates of the share rewards under the Performance Share Plan and the Deferred Bonus Plan represent the gross amount of the rewards of which the applicable taxes will be deducted before the shares are delivered to the participants. The amount of estimated payroll tax accruals accounted for as share-based payment liabilities at 31 December 2016 were EUR 22.7 million (14.7 million).

DEFERRED BONUS PLANS | DBP 2013 | DBP 2014 | DBP 2015 | DBP 2016
No. of participants (at grant) | 560 | 395 | 350 | 340
No. of participants (at 31 December 2016) | 505 | 367 | 339 | 335
Max no. of shares to be delivered (at grant) | 1,640,000 | 950 | 800 | 770
Estimated no. of shares to be delivered at 31 December 2016 1) | 255,451 | 317,125 | 386,432 | 323,017
Share delivery (year) | 2016 | 2017 | 2018 | 2019
Earning criteria (weighting) | Group/Business area EBITDA | Group/Business area EBITDA | Group/Business area EBITDA | Group/Business area EBITDA

1) For DBP 2013 and DBP 2014, the gross amount of the actual no. of shares earne d.
The indicated actuals and estimates of the share rewards under the Performance Share Plan and the Deferred Bonus Plan represent
the gross amount of the rewards of which the applicable taxes will be deducted before the shares are delivered to the participants. The amount
of estimated payroll tax accruals accounted for as sharebased payment liabilities at 31 December 2016 were EUR 22.7 million (14.7 million).
Accounting policies
The group’s long-term share incentive plans are recognised as equity-settled or cash-settled share-based payment transactions depending on the settlement. Shares are valued using the market rate on the grant date. The settlement is a combination of shares and cash.
The group may obtain the necessary shares by using its treasury shares or may purchase shares from the market. PSP and DBP share deliveries are executed by using already existing shares and the plans, therefore, have no dilutive effect.
3.4 Retirement benefit obligations
The group operates various pension schemes in accordance with local conditions and practices in the countries of operations. Retirement benefits are employee benefits that are payable usually after the termination of employment, such as pensions and post-employment medical care. The pension plans are generally funded through payments to insurance companies or to trustee-administered funds or foundations and classified as defined contribution plans or defined benefit plans.
Defined benefit assets and liabilities recognised in the balance sheet are presented below:

|  |  | 2016 | OTHER |  |  |  | 2015 | OTHER |
EURm | FINLAND | UK | GERMANY | OTHER COUNTRIES | TOTAL | FINLAND | UK | GERMANY | OTHER COUNTRIES | TOTAL
Present value of funded |  |  |  |  |  |  |  |  |  |
obligations | 327 | 563 | 34 | 39 | 963 | 314 | 504 | 29 | 41 | 888
Fair value of plan assets | –396 | –426 | –3 | –33 | –858 | –406 | –409 | –2 | –34 | –851
Deficit (+)/surplus (-) | –70 | 137 | 31 | 6 | 104 | –92 | 95 | 27 | 7 | 37
Present value of unfunded |  |  |  |  |  |  |  |  |  |
obligations | – | – | 520 | 90 | 610 | – | – | 490 | 92 | 582
Net defined benefit liability (+)/ |  |  |  |  |  |  |  |  |  |
asset (-) | –70 | 137 | 552 | 96 | 714 | –92 | 95 | 517 | 99 | 619
Net retirement benefit asset in the |  |  |  |  |  |  |  |  |  |
balance sheet | –70 | – | – | –1 | –71 | –92 | – | – | –1 | –93
Net retirement benefit liability in |  |  |  |  |  |  |  |  |  |
the balance sheet 1) | – | 137 | 552 | 95 | 784 | – | 95 | 517 | 100 | 712

1) | Net retirement benefit liability in the balance sheet includes other long-term employee benefits of EUR 33 million (35 million) in 2016.

About 90% of the group’s defined benefit arrangements exist in Finland, in the UK and in Germany. The group has defined benefit obligations also in Austria, Holland, France, Canada and in the US. Approximately a quarter of UPM´s employees are active members of defined benefit arrangement plans.
Finland
In Finland employers are obliged to insure their employees for statutory benefits, as determined in Employee’s Pension Act (TyEL). TyEL provides the employee with insurance protection for old age, disability and death. The benefits can be insured with an insurance company or the employer can establish a fund or a foundation to manage the statutory benefits.
Approximately 90% of group´s Finnish employees are insured with an insurance company and these arrangements qualify as defined contribution plans. Approximately 10 % of employees are insured with TyEL foundation (Kymin eläkesäätiö). The TyEL foundation is administered by the representatives of both the employer and the employees. The foundation has named an authorised representative to take care of its regular operations. The plan is supervised by Financial Supervisory Authority. The foundation is classified as a defined benefit plan for the benefits that must be funded nationally and is the most significant defined benefit pension plan in Finland for UPM.
In Finland, the reform of TyEL will come into effect as of beginning of 2017. The effect of the reform to the defined benefit obligation of the TyEL foundation was recognised in 2015 as a past service cost amounting to EUR 4 million.
UK
In the UK, the group operates a legacy defined benefit scheme providing benefits that are linked to the salary level near retirement age or an earlier date of leaving service. The scheme is closed both for new members and future accrual for old members. Part of the scheme is a defined contribution plan and is open to all current employees. The UK pension scheme operates under a single trust which is independent from the group.
Germany
In Germany employees within defined benefit arrangements are entitled to annual pensions on retirement based on their service and final salary. All significant defined benefit plans are closed for new employees.
Present value of obligation and fair value of plan assets

| Pension and other | Pension and other
| post-employment benefits 2016 | post-employment benefits 2015
|  |  | NET DEFINED |  |  | NET DEFINED
| PRESENT | FAIR VALUE | BENEFIT | PRESENT | FAIR VALUE | BENEFIT
| VALUE OF | OF PLAN | LIABILITY/ | VALUE OF | OF PLAN | LIABILITY/
EURm | OBLIGATION | ASSETS | (ASSET) | OBLIGATION | ASSETS | (ASSET)
Carrying value, at 1 January | 1,470 | –851 | 619 | 1,581 | –794 | 787
Current service cost | 12 | – | 12 | 15 | – | 15
Past service cost | –6 | – | –6 | 2 | – | 2
Interest expense (+) income (–) | 37 | –22 | 15 | 36 | –21 | 15
Total included in employee costs (Note 3.1) | 43 | –22 | 21 | 53 | –21 | 32
Actuarial gains and losses arising from changes in |  |  |  |  |  |
demographic assumptions | –1 | – | –1 | 13 | – | 13
Actuarial gains and losses arising from changes in |  |  |  |  |  |
financial assumptions | 169 | – | 169 | –158 | – | –158
Actuarial gains and losses arising from experience |  |  |  |  |  |
adjustments | 19 | – | 19 | 8 | – | 8
Return on plan assets, excluding amounts included in |  |  |  |  |  |
interest expense (+) income (–) | – | –67 | –67 | – | –16 | –16
Total remeasurement gains (–) and losses (+) included in |  |  |  |  |  |
other comprehensive income | 187 | –67 | 120 | –137 | –16 | –153
Benefits paid | –56 | 56 | – | –59 | 59 | –
Contributions by the employer | – | –33 | –33 | – | –55 | –55
Translation differences | –71 | 59 | –12 | 32 | –24 | 8
Carrying value, at 31 December | 1,573 | –858 | 714 | 1,470 | –851 | 619

Actuarial risks
Defined benefit plans typically expose the group to the following actuarial risks:
Investment risk (asset volatility)
The group is exposed to changes of assets’ values especially in the investments of the foundations and schemes in Finland and in the UK. The asset values of these arrangements constitute 96% of total asset values in defined benefit plans within group.
Interest risk
Discount rates used in calculations are based on high-quality corporate bond yield curves in currency in which the benefits are paid. A decrease in the discount rate would increase the plan liabilities. The maturities of yields are reflecting the durations of the underlying obligations. The weighted average duration of group’s defined benefit obligation is 17 years (17 years) at the end of 2016.
Inflation risk
In the Finnish plan, the inflation risk is not significant as changes in the inflation assumption are mainly covered by the TyEL pooling system. In the UK, the pensions in payment are tied to Retail Price Index whilst being tied to Consumer Price Index during deferment. An increase of 0.5% in indexes will increase the liabilities by some EUR 38 million. In Germany the pensions have to be adjusted in accordance with the Consumer Price Index.
Salary risk
The present value of the net retirement benefit assets and liabilities is calculated by reference to the expected future salaries of plan participants. An increase in the salary of the plan participants would increase the plan liabilities. In Finland, the salary risk is minor as well as in UK, where the changes in salary levels have no impact on the funding position as all defined benefit arrangements in UK are closed to future accrual. In Germany, an increase of 0.5% in expected future salaries would increase the obligation by EUR 16 million.
Life expectancy
Adjustments in mortality assumption have an impact on group’s defined benefit obligation. An increase in life expectancy by one year will increase the obligation in Finland by EUR 13 million, in the UK by EUR 17 million and in Germany by EUR 21 million.
Key estimates and judgements
Several actuarial assumptions are used in calculating the expense and liability related to the plans. Statistical information used may differ materially from actual results due to, among others, changing market and economic conditions, or changes in service period of plan participants. Significant differences in actual experience or significant changes in assumptions may affect the future amounts of the defined benefit obligation and future expense.
Actuarial assumptions
The weighted average principal assumptions used in the valuations of the defined benefit obligations are detailed below:
Sensitivity analysis of defined benefit obligations
The sensitivity analysis shows the effect of the change in assumption. The analysis assume that all other assumptions remain unchanged. The projected unit credit method has been applied when calculating the obligation as well as these sensitivities.
Accounting policies
Defined benefit pension plans
Plan benefits depend on salary and length of service. The defined benefit obligations are calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the term of the related pension liability. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The cost of providing pensions is charged to the income statement as employee costs so as to spread the cost over the service lives of employees. Changes in actuarial assumptions and actuarial gains and losses arising from experience adjustments are charged or credited in other comprehensive income in the period in which they arise. Past service costs and gains or losses on settlement are recognised immediately in income when they occur.
Defined contribution plans
For defined contribution plans, contributions are paid to pension insurance companies. Once the contributions have been paid, there are no further payment obligations. Contributions to defined contribution plans are charged to the income statement in the period to which the contributions relate.
Other post-employment obligations
Some group companies provide post-employment medical and other benefits to their retirees. The entitlement to healthcare benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using an accounting methodology similar to that for defined benefit pension plans. Valuations of these obligations are carried out by independent qualified actuaries.
4. Capital Employed
UPM’s capital employed primarily relates to its production facilities and both forest and energy assets. UPM aims to capture growthopportunities in its existing business portfolio and invest in projects with attractive and sustainable returns. In 2016, growth investments contributed significantly to UPM’s earnings.
Capital Employed

EURm | 2016 | 2015
Property, plant and equipment | 4,657 | 4,895
Forest assets | 1,734 | 1,738
Energy shareholdings | 1,932 | 2,085
Goodwill and other intangible assets | 545 | 570
Operating working capital | 1,694 | 1,875
Provisions | –145 | –154
Net retirement benefit assets and liabilities | –746 | –654
Cash and cash equivalents | 992 | 626
Other assets and liabilities | –3 | 19
Net deferred tax assets and liabilities | –11 | 10
Assets classified as held for sale | 8 | –
Total | 10,657 | 11,010

4.1 Property, plant and equipment
Capitalised borrowing costs
In 2016, the borrowing costs capitalised as part of non-current assets amounted to EUR 1 million (8 million). Amortisation of capitalised borrowing costs was EUR 4 million (4 million) and the average interest rate used 1.56% (4.99%), which represents the average costs to finance the projects.
Capital expenditure
Capital expenditure, excluding acquisitions and shares, amounted to EUR 325 million (486 million) in 2016.
In 2016, UPM’s major capital expenditures related to growth investments. The expansion of the Otepää plywood mill in Estonia and modernising UPM Kaukas pulp mill in Finland were finalised in 2016. In July 2016, UPM announced it will invest EUR 98 million in UPM Kymi pulp mill in Finland to further strengthen its position as a supplier of bleached chemical pulp for growing consumer and industrial end-use segments. Completion of the investment is scheduled for the end of 2017. In October 2016, UPM announced a EUR 35 million investment in UPM Raflatac factory in Poland to meet the increasing label stock demand in Europe. Completion of the investment is scheduled for first half of 2018.

In 2015 UPM’s capital expenditures related to Otepää plywood mill in Estonia, Kaukas and Kymi pulp mills in Finland, share issue from Pohjolan Voima Oy to finance the Olkiluoto 3 nuclear power plant project, increasing of labelstock coating capacity in the Asia-Pacific region, production capacity for film labelstock business in Poland and new paper machine at Changshu mill in China.
Major capital commitments at 31 December

EURm | 2016 | 2015
Capacity increase / Kymi pulp mill | 80 | –
Capacity increase / Raflatac Poland | 33 | –
Debottlenecking / Kaukas pulp mill | – | 49
Mill expansion / Otepää | – | 30

In March 2016, UPM announced the closure of Madison Paper Industries paper mill in the US. Madison Paper Industries is a joint operation between UPM-Kymmene Inc. and Northern SC Paper Corp., a subsidiary of the New York Times Company. With the closure of the mill, UPM recognised impairment charges of EUR 9 million (EUR 20 million in UPM Paper ENA business area and the corresponding adjustment of EUR 11 million in eliminations and reconciliations) on property, plant and equipment. Hydropower assets located at the mill site have been classified as assets held for sale. » Refer Note 8.4 Assets held for sale, for further information. In November 2016, UPM announced the plan to close of SC paper machine 3 at UPM Steyrermühl mill in Austria and SC paper machine 2 at UPM Augsburg mill in Germany. The impairment charges recognised amounted to EUR 23 million and EUR 1 million, respectively, and affected UPM Paper ENA business area. The demand for SC papers, in line with other graphic papers, has been declining during the last years and the decline is expected to continue. In 2015, there were no impairment charges for property, plant and equipment assets.
Accounting policies
Property, plant and equipment
Property, plant and equipment is stated at historical cost. Costs of assets of acquired in business combinations are determined at fair value at the acquisition date. Depreciation is calculated on a straight-line basis and the carrying value is adjusted for impairment charges, if any. The carrying value of property, plant and equipment on the balance sheet represents the cost less accumulated depreciation and any impairment charges.
Borrowing costs incurred for the construction of any qualifying assets are capitalised during the period of time required to complete and prepare the asset for its intended use. Other borrowing costs are expensed.
Major renovations are capitalised and depreciated over the useful lives of the related asset. Ordinary expenses for repairs and maintenance are expensed as incurred.
Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in other operating income and other operating expenses, respectively.

ASSESSED USEFUL LIVES | NUMBER OF YEARS
Land, not subject to depreciation | –
Buildings | 20–50
Power plants | 20–30
Heavy machinery | 15–20
Light machinery | 10–15
Equipment | 5

Impairment testing
Carrying values of individual items included in property, plant and equipment are reviewed at each closing date to determine whether there is any indication of impairment. The carrying value is written down immediately to the asset’s recoverable amount if the carrying value exceeds the estimated recoverable amount. Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. The recoverable amount is determined as the higher of an asset’s fair value less costs to sell and its value in use. Value in use is determined by discounting future cash flows expected to be generated by the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
Non-financial assets, other than goodwill, that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Where an impairment loss is subsequently reversed, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but the increased carrying amount will not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years.
Key estimates and judgements
The estimations of useful lives, residual value as well as depreciation and amortisation methods require significant management judgement and are reviewed annually. Management makes estimates on the future cash flows expected to result from the use of the asset and its eventual disposal. While management believes that estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect valuations.
The long useful lives of assets, changes in estimated future sales prices of products, changes in product costs and changes in the discount rates used could lead to significant impairment charges.
Estimates are also made in an acquisition when determining the fair values and remaining useful lives of acquired intangible and tangible assets.
4.2 Forest assets
UPM is both a major forest owner and a purchaser of wood. Wood is a renewable material and the most important raw material for UPM’s businesses. At the end of 2016, UPM owned 640,000 hectares of forest in Finland and 75,000 hectares of forest in United States. The company additionally has 255,000 hectares of forest plantations in Uruguay. The value of forest assets amounted to EUR 1,734 million (1,738 million) at the end of 2016. In 2016, UPM sourced 27.8 (26.1) million cubic meters of wood from around the world.
Forest assets

EURm | 2016 | 2015
Carrying value, at 1 January | 1,738 | 1,469
Additions | 26 | 16
Disposals | –72 | –72
Wood harvested | –106 | –91
Net change in fair value | 133 | 377
Reclassifications | –1 | –
Translation differences | 15 | 39
Carrying value, at 31 December | 1,734 | 1,738

Change in fair value, change due to harvesting and gains or losses on sale of forest assets are recognised in the income statement as a net amount totalling to EUR 88 million (352 million) in 2016.
In 2015, the fair value of forest assets in Finland was increased by EUR 265 million due to adjustment of long-term wood price estimates and change in discount rate. UPM continues to estimate a declining trend of real wood prices in Finland, although with a slightly slower rate than previously. In addition, the pre-tax discount rate used to determine the fair value of the Finnish forests was lowered from 7.5% to 7.0% in 2015.
Accounting policies
The group divides all its forest assets for accounting purposes into growing forests, which are recognised as forest assets at fair value less costs to sell, and land, which is stated at cost. Any changes in the fair value of the growing forests are recognised in the operating profit in the income statement. The fair value is calculated on the basis of discounted future expected cash flows as there is a lack of a liquid market. Young saplings are valued at cost. The fair value of forest assets is a level 3 measure in terms of the fair value measurement hierarchy.
Key estimates and judgements
Fair valuation
The valuation process of forest assets is complex and requires management estimates and judgment on assumptions that have a significant impact on the valuation of the group’s forest assets.
Main factors used in the fair valuation of forest assets are estimates for growth and wood harvested, stumpage prices and discount rates. Stumpage price forecasts are based on the current prices adjusted by the management’s estimates for the full remaining productive lives of the trees, up to 100 years for forests in Finland and in the US and up to 10 years for plantations in Uruguay. The cash flows are adjusted by selling costs and risks related to the future growth. Felling revenues and maintenance costs are estimated on the basis of actual costs and prices, taking into account the group’s projection of future price and costs development. In addition, calculations take into account environmental restrictions.
The pre-tax discount rate used to determine the fair value of the Finnish forests in 2016 was 7.0% (7.0%) and for Uruguayan plantations 10.0% (10.0%). A decrease (increase) of one percentage point in discount rate would increase (decrease) the fair value of forest assets by approximately EUR 240 million (260 million).
4.3 Energy shareholdings
UPM is both a significant purchaser and producer of energy. The majority of electrical and thermal energy is consumed at the group’s pulp and paper production. The production is mainly carried out by energy companies in which UPM has energy shareholdings. Energy shareholdings are unlisted
equity investments. UPM does not have control or joint control of or significant influence in the said energy companies.
The value of energy shareholdings amounted to EUR 1,932 million (2,085 million) at the end of 2016. These energy companies supply energy or both energy and heat to their shareholders on a cost-price principle (Mankala-principle) which is widely applied in the Finnish energy industry. Under the Mankala-principle energy and/or heat is supplied to the shareholders in proportion to their ownership and each shareholder is, pursuant to the specific stipulations of the respective articles of association, severally responsible for its respective share of the production costs of the energy company concerned.

| Number of shares | Group holding % | Carrying value, EURm
|  |  | 2016 | 2015
Pohjolan Voima Oy, A series | 8,176,191 | 61.24 | 315 | 324
Pohjolan Voima Oy, B series | 4,140,132 | 58.11 | 1036 | 1,166
Pohjolan Voima Oy, B2 series | 2,414,940 | 51.13 | 179 | 169
Kemijoki Oy | 179,189 | 7.33 | 297 | 314
Länsi-Suomen Voima Oy | 10,220 | 51.10 | 92 | 92
Other | – | – | 13 | 20
Carrying value, at 31 December |  |  | 1,932 | 2,085

PVO’s share capital is divided into different series of shares. The B and B2 series relate to PVO’s shareholdings in Teollisuuden Voima Oyj (TVO). UPM has no direct shareholdings in TVO. TVO operates two nuclear power plants (Olkiluoto 1 and Olkiluoto 2) and constructs one new nuclear power plant in Olkiluoto (Olkiluoto 3), Finland.
The operation of a nuclear power plant is governed by international, European Union and local nuclear regulatory regimes. Pursuant to the Finnish Nuclear Liability Act, the operator of a nuclear facility has a strict third-party liability in relation to nuclear accidents. Shareholders of power companies that own and operate nuclear power plants are not subject to the liability under the Nuclear Liability Act. In Finland, the future costs of conditioning, storage and final disposal of spent fuel, management of low and intermediate level radioactive waste as well as nuclear power plant decommissioning are provided for by a state established fund (the Finnish State Nuclear Waste Management Fund). The contributions to the Fund are intended to be sufficient to cover estimated future costs. These contributions have been taken into consideration in the fair value of the related energy shareholdings.
Other uncertainties and risk factors relate to start-up schedule of the fixed price turn-key Olkiluoto 3 EPR nuclear power plant project and the on-going arbitration proceedings between the plant supplier AREVA-Siemens Consortium and the plant owner Teollisuuden Voima Oyj (TVO). UPM’s indirect share of the capacity of Olkiluoto 3 EPR is approximately 31%, through its PVO B2 shares. The possible outcome of the arbitration proceedings has not been taken into account in the valuation. Changes in regulatory environment or taxation could also have an impact on the energy shareholdings’ value.

• | Refer Note 9.2 Litigation, for further information.

Energy shareholdings

EURm | 2016 | 2015
Carrying value, at 1 January | 2,085 | 2,510
Additions | – | 33
Impairment charges | 1 | –
Disposals | –6 | –35
Reclassifications into level 3 | – | 1
Changes in fair value recognised in other |  |
comprehensive income | –148 | –424
Carrying value, at 31 December | 1,932 | 2,085

Accounting policies
Purchases of energy shareholdings are recognised on the settlement date initially at cost, including transaction costs, and subsequently measured at fair value through other comprehensive income, net of tax if applicable. When the investments are sold or impaired, the accumulated fair value adjustments in equity are recognised through the income statement. Significant or prolonged decline in the fair value of the security below its cost is considered when determining whether the investments are impaired. Any impairment losses recognised for these investments are not subsequently reversed.
The fair value of energy shareholdings is a level 3 measure in terms of the fair value measurement hierarchy.
Key estimates and judgements
Fair valuation and sensitivity
Valuation of energy shareholdings requires management’s assumptions and estimates of a number of factors that may differ from the actual outcome which could lead to significant adjustment to the carrying amount of the asset. Fair value is determined on a discounted cash flow basis and the main factors impacting the future cash flows include future electricity prices, price trends and discount rates.
The electricity price estimate is based on a simulation of the Finnish area electricity price. A change of 5% in the electricity price used in the model would change the total value of the assets by EUR 333 million. The discount rate of 5.85% used in the valuation model is determined using the weighted average cost of capital method. A change of 0.5% in the discount rate would change the estimated fair value of the assets by approximately EUR 310 million.
4.4 Goodwill and other intangible assets
The group’s goodwill mainly relates to pulp operations in Finland and Uruguay belonging to UPM Biorefining business area.
Goodwill by business area

EURm | 2016 | 2015
UPM Biorefining | 223 | 220
UPM Raflatac | 7 | 7
UPM Plywood | 13 | 13
Other operations | 1 | 1
Total | 245 | 241

Goodwill

EURm | 2016 | 2015
Carrying value, at 1 January | 241 | 230
Translation differences | 3 | 11
Carrying value, at 31 December | 245 | 241

Other intangible assets

|  | SOFTWARE AND |
|  | OTHER INTANGIBLE |
EURm | INTANGIBLE RIGHTS | ASSETS | TOTAL
2016 |  |  |
Accumulated costs | 523 | 665 | 1,189
Accumulated amortisation and impairments | –306 | –628 | –933
Carrying value, at 31 December | 218 | 38 | 256
Carrying value, at 1 January | 224 | 53 | 277
Additions | 5 | 7 | 12
Disposals | – | –1 | –1
Amortisation | –6 | –19 | –25
Impairment | – | –2 | –2
Reclassifications | –4 | – | –3
Translation differences | –1 | – | –1
Carrying value, at 31 December | 218 | 38 | 256
Emission rights, net carrying value 1) |  |  | 45
Carrying value including emission rights, at 31 December |  |  | 301
2015 |  |  |
Accumulated costs | 536 | 669 | 1,205
Accumulated amortisation and impairments | –312 | –616 | –928
Carrying value, at 31 December | 224 | 53 | 277
Carrying value, at 1 January | 226 | 71 | 297
Additions | 4 | 7 | 11
Amortisation | –8 | –25 | –33
Translation differences | 2 | – | 2
Carrying value, at 31 December | 224 | 53 | 277
Emission rights, net carrying value 1) |  |  | 52
Carrying value including emission rights, at 31 December |  |  | 329

1) | » Refer Note 2.3 Operating expenses and other operating income, for further information on emission rights.

Impairment testing
Impairment tests for goodwill and water rights with indefinite life were carried out in the fourth quarter 2016. The values of water rights were tested based on expected future cash flows of each separate hydro power plant. Water rights of hydropower plants belonging to UPM Energy and reported in intangible rights amounted EUR 189 million at the end of 2016 and 2015.
Goodwill impairment tests were carried out for pulp operations in Finland and Uruguay, belonging to UPM Biorefining business area, UPM Raflatac business area and UPM Plywood business area.
The 2016 impairment tests did not result in a recognition of any impairment.
The basis for valuation and key assumptions used in goodwill impairment testing are summarised in below table.

CASH GENERATING UNIT | BASIS OF VALUATION | PERIOD OF FORECAST | PRE-TAX DISCOUNT RATE | KEY ASSUMPTIONS
Pulp operations Finland | Value in use | 10 years + terminal value | 10.92% | (2015: 11.02%) | Pulp price, wood costs
Pulp operations Uruguay | Value in use | 10 years + terminal value | 10.38% (2015: 10.38%) | Pulp price, wood costs
UPM Raflatac | Value in use | 10 years + terminal value | 9.94% | (2015: 9.94%) | Product prices, cost development
UPM Plywood | Value in use | 10 years + terminal value | 10.35% (2015: 10.35%) | Product prices, cost development

Sensitivity analyses
The sensitivity analyses of goodwill impairment tests indicate that no reasonable change in key assumptions would result in recognition of impairment loss against goodwill. In pulp operations the recoverable amount is most sensitive to pulp sales prices and the cost of wood raw material.
As at 31 December 2016, for pulp operations Finland, a decrease of more than 15.8% in pulp prices would result in recognition of impairment loss against goodwill. The group believes that no reasonable change in wood cost would cause the aggregate carrying amount to exceed the recoverable amount. For pulp operations Uruguay, a decrease of more than 3.2% in pulp prices or an increase of more than 9.2% in wood cost would result in recognition of impairment loss against goodwill. A decrease of more than 5.0% in pulp prices or an increase of more than 14.2% in wood cost would result in a write-down of the entire goodwill.
Key estimates and judgements
The group’s assessment of the carrying value of goodwill and indefinite life assets requires significant judgement.
While management believes that estimates of future cash flows are reasonable, different assumptions are subject to change as a result of changing economic and operational conditions. Actual cash flows could therefore vary from estimated discounted future cash flows and could result in changes in the recognition of impairment charges in future periods.
Future cash flows
The review of recoverable amount for goodwill and indefinite life assets is based on a calculation of value in use, using management projections of future cash flows. The most important assessments and assumptions needed in calculations are forecasts for future growth rates for the business in question, product prices, cost development and the discount rates applied. The group is using ten-year forecasts in calculations as the nature of the group’s business is long-term, due to its capital intensity, and is exposed to cyclical changes. In estimates of product prices and cost development, forecasts prepared by management for the next three years and estimates made for the following seven years are taken into consideration. In addition, consideration is given to the investment decisions made by the group as well as the profitability programmes that the group has implemented and the views of knowledgeable industry experts on the long-term development of demand and prices. In the projection of cash flows UPM uses EBITDA adjusted with cash flows not captured within EBITDA, including working capital movements and capital expenditures.
Discount rate
The discount rate is estimated using the weighted average cost of capital (WACC) on the calculation date adjusted for risks specific to the business in question. The adjusted after-tax discount rate is translated to a pre-tax rate for each cash generating unit (CGU) based on the specific tax rate applicable to where the CGU operates.
Accounting policies
Goodwill
Goodwill arises in connection with business combinations where the consideration transferred exceeds the fair value of the acquired net assets. Goodwill is recognised at cost less accumulated impairment and is an intangible asset with an indefinite useful life. Goodwill is allocated to the cash generating units that are expected to benefit from the synergies from the business combination.
Intangible rights
Intangible rights include water rights of hydropower plants, patents, licences, intellectual property and similar rights. Water rights are deemed to have an indefinite useful life as the company has a contractual right to exploit water resources in the energy production of power plants. The values of water rights are tested annually for impairment based on expected future cash flows of each separate hydropower plant. Other intangible rights are recognised at cost less accumulated depreciation and impairment. Amortisation is calculated using the straight-line method over their estimated useful lives ranging from 5 to 10 years.
Software and other intangible assets
Research expenditure is recognised as an expense as incurred. Costs incurred in acquiring software that will contribute to future period financial benefit are capitalised to software and systems. Other intangible assets are recognised at cost less accumulated amortisation and impairment. Amortisation is calculated using the straight-line method over their estimated useful lives ranging from 3 to 5 years.
Impairment testing
Goodwill and other intangible assets that are deemed to have an indefinite life are tested at least annually for impairment. For goodwill impairment testing purposes the group identifies its cash-generating units (CGUs), which is the smallest identifiable group of assets that generate cash inflows largely independent of the cash inflows of other assets or other groups of assets. Each CGU is no larger than a business area. The carrying amount for the CGU includes goodwill, non-current assets and working capital. If the balance sheet carrying amount of the CGU unit exceeds its recoverable amount, an impair ment loss is recognised. Impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.
Other intangible assets with indefinite useful lives are impaired if the recoverable amount of the asset is less than the carrying amount. The carrying amount of the asset is then reduced to the recoverable amount which is the higher of the asset’s net selling price and its value in use.
4.5 Provisions

EURm |  | RESTRUCTURING | TERMINATION | ENVIRONMENTAL | EMISSIONS | OTHER | TOTAL
2016 |  |  |  |  |  |  |
Provisions at 1 January | 47 | 51 | 24 | 14 | 18 | 154
Provisions made during the year | 16 | 36 | 5 | 9 | 4 | 70
Provisions utilised during the year | –12 | –30 | –1 | –10 | –4 | –58
Unused provisions reversed | –5 | –3 | –7 | –3 | –2 | –20
Provisions at 31 December | 45 | 54 | 21 | 9 | 16 | 145
Non-current |  |  |  |  |  | 90
Current |  |  |  |  |  |  | 56
Total |  |  |  |  |  |  | 145
2015 |  |  |  |  |  |  |
Provisions at 1 January | 50 | 109 | 26 | 12 | 17 | 214
Provisions made during the year | 3 | 9 | – | 14 | 6 | 32
Provisions utilised during the year | –8 | –55 | –1 | –11 | –2 | –77
Unused provisions reversed | –4 | –6 | –1 | –1 | –1 | –13
Companies sold | – | – | – | – | –2 | –2
Reclassifications | 6 | –6 | – | – | – | –
Provisions at 31 December | 47 | 51 | 24 | 14 | 18 | 154
Non-current |  |  |  |  |  | 92
Current |  |  |  |  |  |  | 62
Total |  |  |  |  |  |  | 154

UPM has undergone several restructurings in recent years including mill closures and profit improvement programs. Restructuring provisions recognised include various restructuring activities including dismantling costs. Termination provisions include severance payments, unemployment compensations or other arrangements for employees leaving the company. In Finland termination provisions include also unemployment arrangements and disability pensions. Unemployment provisions in Finland are recognised 2–3 years before the granting and settlement of the compensation.
At 31 December 2016, restructuring provisions and termination provisions relate mainly to capacity closures in UPM Paper ENA business area. In 2016, UPM has closed Madison paper mill in the US. Paper machine 3 at UPM Steyrermühl mill in Austria and paper machine 2 at UPM Augsburg mill in Germany closures are planned to take place in 2017. Total provisions made relating to these closures amounted to EUR 53 million in 2016. At 31 December 2015, restructuring provisions and termination provisions related mainly to mill closures of prior years and operational restructuring in Finland and France.
The group recognises provisions for normal environmental remediation costs expected to be incurred in a future period upon a removal of non-current assets and restoring industrial landfills where a legal or constructive obligation exists.
Other provisions are mainly attributable to onerous contracts and will be incurred over a period longer than one year.
Provisions for emissions include liability to cover the obligation to return emission rights. The group possesses emission rights amounting to EUR 45 million (52 million) as intangible assets. » Refer Note 2.3 Operating expenses and other operating income, for further information on emission rights.
Accounting policies
A provision is recognised when a present legal or constructive obligation exists as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are split between amounts expected to be settled within 12 months of the balance sheet date (current) and amounts expected to be settled later (non-current).
Restructuring and termination provisions
A restructuring provisions is recognised when a detailed plan for the implementation of the measures is complete and when the plan has been communicated to those who are affected. Employee termination provisions are recognised when the group has communicated the plan to the employees.
Environmental provisions
Environmental expenditures that relate to an existing condition caused by past operations that do not contribute to future earnings are expensed. The recognition of environmental provisions is based on current interpretations of environmental laws and regulations. Such provisions are recognised when the group has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located. The amount recognised is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. A corresponding item of property, plant and equipment of an amount equivalent to the provision is also recognised and subsequently depreciated as part of the asset. Provisions do not include any third-party recoveries.
Emission provisions
Emission obligations are recognised in provisions based on realised emissions. The provision is measured at the carrying amounts of the corresponding emission rights held, which are recognised as intangible assets. In case of deficit in emission rights, the shortage is valued at the market value at the balance sheet date.
Key estimates and judgements
Environmental provisions
The estimates used in determining the provisions are based on the expenses incurred for similar activities in the current reporting period taking into account the effect of inflation, cost-base development and discounting. Because actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, prices and conditions, and can take placrmany years in the future, the carrying amounts of provisions areregularly reviewed and adjusted to take into account of any such changes. The discount rate applied is reviewed annually.
The group aims to operate in compliance with regulations related to the treatment of waste water, air emissions and landfill sites. However, unexpected events during production processes and waste treatment could cause material losses and additional costs in the group’s operations.
Legal contingencies
Management judgement is required in measurement and recognition of provisions related to pending litigation. Provisions are recorded when the group has a present legal or constructive obligation as a result of past event, an unfavourable outcome is probable and the amount of loss can be reasonably estimated. Due to inherent uncertain nature of litigation, the actual losses may differ significantly from the originally estimated provision. » Refer Note 9.2 Litigation for details of legal contingencies.
4.6 Working capital
The group defines operating working capital as inventories, trade receivables and trade payables which are presented separately below. UPM is focusing on working capital efficiency and targeting a sustainable and permanent reduction in operating working capital.
Operating working capital

EURm | 2016 | 2015
Inventories | 1,346 | 1,376
Trade receivables | 1,360 | 1,436
Trade payables | –994 | –917
Advances received | –19 | –20
Total | 1,694 | 1,875

Inventories

EURm | 2016 | 2015
Raw materials and consumables | 625 | 646
Work in progress | 54 | 54
Finished products and goods | 645 | 642
Advance payments | 23 | 34
Total | 1,346 | 1,376

Trade and other receivables

EURm | 2016 | 2015
Trade receivables |  |
Undue | 1,211 | 1,193
Past due up to 30 days | 114 | 159
Past due 31–90 days | 17 | 45
Past due over 90 days | 18 | 39
Total trade receivables | 1,360 | 1,436
Prepayments and accrued income |  |
Personnel expenses | 5 | 9
Interest income | 1 | 3
Energy and other excise taxes | 60 | 66
Other items | 69 | 56
Total prepayments and accrued income | 134 | 134
Other receivables |  |
VAT and other indirect taxes receivable | 170 | 131
Other | 62 | 42
Total other receivables | 231 | 173
Total | 1,726 | 1,743

Operational credit risk
Operational credit risk is defined as the risk where UPM is not able to collect the payments for its receivables. The group has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Outstanding trade receivables, days of sales outstanding (DSO) and overdue trade receivables are followed on monthly basis. Potential concentrations of credit risk with respect to trade and other receivables are limited due to the large number and the geographic dispersion of customers. Customer credit limits are established and monitored, and ongoing evaluations of their financial condition is performed. Most of the receivables are covered by trade credit insurances. In certain market areas, including Asia and Northern Africa, measures to reduce credit risks include letters of credit, prepayments and bank guarantees. Maximum exposure to credit risk, without taking into account any credit enhancements, is the carrying amount of trade and other receivables.
UPM does not have significant concentration of customer credit risk. The ten largest customers accounted for approximately 18% (20%) of the trade receivables as at 31 December 2016 – i.e., approximately EUR 239 million (285 million).
In 2016, trade receivables amounting to EUR 10 million (18 million) were impaired and the loss was recorded under other costs and expenses. Impairment is recognised when there is objective evidence that the group is not able to collect the amounts due. There are no indications that the debtors will not meet their payment obligations with regard to trade receivables that are not overdue or impaired at 31 December 2016.
Trade and other payables

EURm | 2016 | 2015
Accrued expenses and deferred income |  |
Personnel expenses | 212 | 203
Interest expenses | 30 | 35
Indirect taxes | 5 | 4
Customer rebates and other items | 205 | 188
Total accrued expenses and deferred income | 451 | 430
Advances received | 19 | 20
Trade payables | 994 | 917
Other current liabilities | 130 | 96
Total | 1,594 | 1,463

Accounting policies
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined by the method most appropriate to the particular nature of inventory, the first-in, first-out (FIFO) or weighted average cost. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. If the net realisable value is lower than cost, a valuation allowance is established for inventory obsolescence.
Trade receivables
Trade receivables arising from selling goods and services in the normal course of business are recognised initially at fair value and subsequently measured at amortised cost, less a provision for impairment. Provision for impairment is charged to the income statement when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of receivables. In determining the recoverability of trade receivables the group considers any change to the credit quality of trade receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy, or default or delinquency in payments more than 90 days overdue are considered indicators that the trade receivable may be irrecoverable. Subsequent recoveries of amounts previously written off are credited to the income statement. The carrying amount of trade receivables approximates to their fair value due to the short-term nature of the receivables.
Trade payables
Trade payables arise from purchase of inventories, fixed assets and goods and services in the ordinary course of business from UPM’s suppliers. Trade and other payables are classified as current liabilities if they are due to be settled within the normal operating cycle of the business or within 12 months from the balance sheet date. Trade payables are recognised initially at fair value and subsequently at amortised cost using the effective interest method. The carrying amount of trade payables approximates to their fair value due to the short-term nature of the payables.

5. | Capital structure

UPM has a strong cash flow and industry-leading balance sheet that mitigates risks and enables value-enhancing strategic actions.

Net debt | Free cash flow
EUR 1,131m | EUR 1,424m
(EUR 2,100m) | (EUR 750m)

5.1 Capital management
UPM’s objective for managing capital comprising of net debt and total equity is to ensure maintenance of flexible capital structure to enable the ability to operate in capital markets and maintain optimal returns to shareholders. The group manages its financing activities, debt portfolio and financial resources via various policies that are designed to ensure optimum financing arrangements minimising simultaneously financial expenses and refinancing risk and optimising liquidity. Borrowing activities are centralised to the parent to the extent possible and cash resources are distributed within the group by the central treasury department.
UPM targets a net debt to EBITDA ratio of approximately 2 times or less.
Liquidity and refinancing risk
UPM seeks to maintain adequate liquidity under all circumstances by means of efficient cash management and restricting financial investments to investment types that can readily be converted into cash. Adequate liquidity is maintained by keeping sufficient amount of unused committed credit lines as a reserve.
Refinancing risks are minimised by ensuring a balanced loan portfolio maturing schedule and sufficiently long maturities.
The average loan maturity at 31 December 2016 was 5.3 years (5.5 years).
UPM has some financial agreements which have gearing as a financial covenant whereby it should not exceed 110%
UPM’s capital

EURm | 2016 | 2015
Equity attributable to owners of the parent |  |
company | 8,234 | 7,942
Non-controlling interest | 3 | 2
Total equity | 8,237 | 7,944
Non-current debt | 1,835 | 2,797
Current debt | 585 | 269
Total debt | 2,419 | 3,066
Total capitalisation | 10,657 | 11,010
Total debt | 2,419 | 3,066
Less: Interest-bearing financial assets | –1,289 | –966
Net debt | 1,131 | 2,100
Gearing ratio, % 1) | 14 | 26
Net debt to EBITDA 1) | 0.73 | 1.56

1) | Refer Note 10.2 , Alternative performance measures

Liquidity

EURm | 2016 | 2015
Cash at bank | 590 | 545
Cash equivalents | 402 | 81
Committed credit lines | 656 | 1,025
of which used | –5 | –
Used uncommitted credit lines | –26 | –103
Long-term loan repayment cash flow | –477 | –145
Liquidity | 1,140 | 1,403

Cash and cash equivalents comprise cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts are included in used uncommitted credit lines and presented within current debt in the balance sheet.
The most important financial programmes in use are:
Committed:
– Bilateral revolving credit lines. Uncommitted:
– Domestic commercial paper programme, EUR 1,000 million.
Maturity table of debt at the end of 2016

EURm | 2017 | 2018 | 2019 | 2,020 | 2021 | 2022+ | TOTAL
Bonds | 292 | 237 | – | – | – | 421 | 885
Loans from financial institutions | 21 | 305 | 320 | 453 | 19 | 26 | 685
Pension | 74 | 74 | – | – | – | – | 148
Finance | 88 | 7 | 8 | 49 | 5 | 37 | 195
Other | 1 | 4 | 1 | 1 | – | 173 | 180
Current | 26 | – | – | – | – | – | 26
Principal payments | 502 | 628 | 328 | 65 | 15 | 581 | 2,118
Interest | 88 | 50 | 41 | 36 | 35 | 218 | 468

The difference between the above nominal values and carrying value of total debt arise from fair value adjustments increasing carrying value by
EUR 202 million and other non-cash adjustments decreasing carrying value by EUR 18 million.
Maturity table of debt at the end of 2015

EURm | 2016 | 2017 | 2018 | 2019 | 2020 | 2021+ | TOTAL
Bonds | – | 340 | 230 | – | – | 421 | 991
Loans from financial institutions | 37 | 208 | 313 | 453 | 19 | 26 | 1,056
Pension | 74 | 74 | 74 | – | – | – | 222
Finance | 32 | 86 | 5 | 6 | 47 | 22 | 198
Other | 2 | 2 | 2 | – | 1 | 163 | 170
Current | 103 | – | – | – | – | – | 103
Principal | 248 | 710 | 624 | 459 | 67 | 632 | 2,74
Interest | 101 | 96 | 56 | 42 | 37 | 271 | 603

The difference between the above nominal values and carrying value of total debt arise from fair value adjustments increasing carrying value by
EUR 256 million and other non-cash adjustments decreasing carrying value by EUR 22 million.
Maturity table of derivatives and guarantees at the end of 2016

| 2017 | 2018 | 2019 | 2020 | 2021 | 2022+ | TOTAL
Net settled interest rate swaps |  |  |  |  |  |  |
Net inflow | 52 |  | 23 |  | 14 |  | 13 |  | 12 |  | 66 |  | 180 |
Net outflow | (8 | ) | (7 | ) | (8 | ) | (6 | ) | (5 | ) | (4 | ) | (38 | )
Gross settled derivatives: |  |  |  |  |  |  |
Gross currency swaps |  |  |  |  |  |  |
Total inflow | 302 |  | 101 |  | 9 |  | 7 |  | 7 |  | 226 |  | 652 |
Total outflow | (371 | ) | (78 | ) | (1 | ) | (2 | ) | (2 | ) | (193 | ) | (647 | )
Forward foreign exchange contracts |  |  |  |  |  |  |
Total inflow | 369 |  | — |  | — |  | — |  | — |  | — |  | 369 |
Total outflow | (368 | ) | — |  | — |  | — |  | — |  | — |  | (368 | )
Guarantees | 2 |  | — |  | — |  | — |  | — |  | — |  | 2 |

Maturity table of derivatives and guarantees at the end of 2015

| 2017 | 2018 | 2019 | 2020 | 2021 | 2022+ | TOTAL
Net settled interest rate swaps |  |  |  |  |  |  |
Net inflow | 54 |  | 53 |  | 23 |  | 11 |  | 12 |  | 82 |  | 235 |
Net outflow | (7 | ) | (7 | ) | (5 | ) | (6 | ) | (2 | ) | — |  | (27 | )
Gross settled derivatives: |  |  |  |  |  |  |
Gross currency swaps |  |  |  |  |  |  |
Total inflow | 18 |  | 354 |  | 101 |  | 12 |  | 10 |  | 325 |  | 820 |
Total outflow | (8 | ) | (374 | ) | (82 | ) | (5 | ) | (6 | ) | (335 | ) | (810 | )
Forward foreign exchange contracts |  |  |  |  |  |  |
Total inflow | 671 |  | — |  | — |  | — |  | — |  | — |  | 671 |
Total outflow | (673 | ) | — |  | — |  | — |  | — |  | — |  | (673 | )
Guarantees | 4 |  | — |  | — |  | — |  | — |  | — |  | 4 |

5.2 Net debt
Net debt is defined as the total of current and non-current debt less cash and cash equivalents and interest-bearing current and non-current assets. Net debt totalled EUR 1,131 million at the end of 2016 (2,100 million). Following the strong cash flow during 2016, the group was able to reduce net debt by EUR 969 million.
Net debt

EURm | 2016 | 2015
Bonds | 717 | 1,165
Loans from financial institutions | 664 | 1,013
Pension loans | 77 | 158
Finance leases | 106 | 167
Derivatives | 34 | 71
Other loans | 236 | 223
Non-current debt | 1,835 | 2,797
Repayments of non-current debt | 477 | 144
Derivatives | 82 | 21
Other liabilities | 26 | 104
Current debt | 585 | 269
Total debt | 2,419 | 3,066
Loan receivables | 11 | 10
Derivatives | 216 | 278
Other receivables | 32 | 30
Non-current interest-bearing assets | 259 | 318
Loan receivables | 6 | 5
Derivatives | 12 | 9
Other receivables | 19 | 8
Cash and cash equivalents | 992 | 626
Current interest-bearing assets | 1,030 | 648
Total interest-bearing assets | 1,289 | 966
Net debt | 1,131 | 2,100

Accounting policies
Debt
Debt comprising of bonds, bank and pension loans and other loans is recognised initially at fair value, net of transaction costs and subsequently measured at amortised cost using the effective interest method. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the estimated life of the borrowing. UPM classifies debt as non-current unless due for settlement within a year. Most of the debt is hedged in a fair value hedge relationship as described in » Note 6.1 Financial risk management .
Change in net debt 2016 (Reported in financing activities in cash flow statement)

| NON-CURRENT |  |  |  | OTHER | CASH AND |  |
| LOANS INCL. | FINANCE | CURRENT | NET | FINANCIAL | CASH |  |
EURm | REPAYMENTS | LEASES | LOANS | DERIVATIVES | ASSETS | EQUIVALENTS | NET DEBT |
Carrying value, at 1 January | –2,672 | –198 | –104 | 195 |  | 626 | –2,100 |
53 |
Change in net debt, cash: |  |  |  |  |  |  |  |
Proceeds from non-current debt | –1 | – | – | – | – | – | –1 |
Payments of non-current debt | 533 | 7 | – | – | – | – | 540 |
Change in current liabilities | – | – | 77 | – | – | – | 77 |
Net cash flows from derivatives | – | – | – | 22 | – | – | 22 |
Change in other financial assets in |  |  |  |  |  |  |  |
operating cash flow | – | – | – | – | 13 | – | 13 |
Change in other financial assets in |  |  |  |  |  |  |  |
investing cash flow | – | – | – | – | 2 | – | 2 |
Change in cash and cash equivalents |  |  |  |  | – | 367 | 367 |
| 532 | 7 | 77 | 22 | 15 | 367 | 1,020 |
Change in net debt, non-cash: |  |  |  |  |  |  |  |
Fair value gains and losses | 55 | – | – | –105 | – | – | –50 |
Exchange gains and losses | 11 | – | 1 | – | – | –1 | 11 |
Effective interest rate adjustment | –8 | – | – | – | – | – | –8 |
Other non-cash changes | – | –4 | – | – | – | – | –4 |
| 58 | –4 | 1 | –105 | – | –1 | –51 |
Carrying value, at 31 December | –2,082 | –195 | –26 | 112 | 68 | 992 | –1,131 |

Change in net debt 2015 (Reported in financing activities in cash flow statement)

| NON-CURRENT |  |  |  | OTHER | CASH AND |  |
| LOANS INCL. | FINANCE | CURRENT | NET | FINANCIAL | CASH |  |
EURm | REPAYMENTS | LEASES | LOANS | DERIVATIVES | ASSETS | EQUIVALENTS | NET DEBT |
Carrying value, at 1 January | –2,978 | –272 | –74 | 166 |  | 700 | –2,401 |
57 |
Change in net debt, cash: |  |  |  |  |  |  |  |
Proceeds from non-current debt | –22 | – | – | – | – | – | –22 |
Payments of non-current debt | 439 | 80 | – | – | – | – | 519 |
Change in current liabilities | – | – | –22 | – | – | – | –22 |
Net cash flows from derivatives | – | – | – | –43 | – | – | –43 |
Change in other financial assets in |  |  |  |  |  |  |  |
operating cash flow | – | – | – | – | –3 | – | –3 |
Change in cash and cash equivalents | – | – | – | – | – | –75 | –75 |
| 417 | 80 | –22 | –43 | –3 | –75 | 354 |
Change in net debt, non-cash: |  |  |  |  |  |  |  |
Fair value gains and losses | 5 | – | – | 72 | – | – | 77 |
Exchange gains and losses | –105 | –1 | –8 | – | –1 | 1 | –114 |
Effective interest rate adjustment | –11 | – | – | – | – | – | –11 |
Other non-cash changes | – | –5 | – | – | – | – | –5 |
| –111 | –6 | –8 | 72 | –1 | 1 | –53 |
Carrying value, at 31 December | –2,672 | –198 | –104 | 195 | 53 | 626 | –2,100 |

Free cash flow
Free cash flow is primarily a liquidity measure. It is an important indicator of UPM’s overall operational performance as it reflects the cash generated from operations after investing activities. UPM’s free cash flow has enabled payment of dividends as well as repayments of debt reducing net debt significantly.

EURm | 2016 | 2015
Operating cash flow | 1,686 | 1,185
Investing cash flow | –262 | –435
Free cash flow | 1,424 | 750
Dividends paid | –400 | –373
Other financing cash flow | –19 | –20
Change in other financial assets in operating |  |
cash flow | 13 | –3
Change in other financial assets in investing |  |
cash flow | 2 | –
Change in net debt, cash | 1,020 | 354
Change in net debt, non-cash | –51 | –53
Decrease in net debt | 969 | 301
Opening net debt | –2,100 | –2,401
Closing net debt | –1,131 | –2,100

Bonds

|  |  | NOMINAL | CARRYING | CARRYING
| INTEREST |  | VALUE ISSUED, | VALUE 2016 | VALUE 2015
FIXED RATE PERIOD | RATE, % | CURRENCY | MILLION | EURm | EURm
1997–2027 | 7.450 | USD | 375 | 471 | 470
2000–2016 | 3.550 | JPY | 10,000 | – | 95
2002–2017 | 6.625 | GBP | 250 | 293 | 355
2003–2018 | 5.500 | USD | 250 | 246 | 245
Value, at 31 December |  |  |  | 1,010 | 1,165
Current portion |  |  |  | 292 | –
Non-current portion |  |  |  | 718 | 1,165

Leases
UPM has a sale and leaseback agreement and three finance lease agreements regarding power plant machinery outstanding at the end of 2016. The group uses the energy generated by these plants for its own production. The group also has a finance lease arrangement over the usage of a waste water treatment plant. In addition, the group leases certain production assets and buildings under long term lease arrangements. In 2016, one new finance lease agreement was made with present value of EUR 2 million.
Leased assets included in property, plant and equipment

EURm | 2016 | 2015
Accumulated costs | 154 | 153
Accumulated depreciation and impairments | –59 | –46
Carrying value, at 31 December | 95 | 107

The group also leases office, manufacturing and warehouse space through various non-cancellable operating leases. Certain contracts contain renewal options for various periods of time.
Future minimum lease payments

| Finance leases |  | Operating leases |
EURm | 2016 | 2015 | 2016 | 2015
Within 1 year | 94 | 37 | 74 | 65
Between 1 and 5 years | 73 | 152 | 189 | 165
Later than 5 years | 40 | 24 | 185 | 190
Total | 207 | 213 | 448 | 420
Of which interest | –12 | –15 | – | –
Present value of future minimum lease payments | 195 | 198 | – | –

Accounting policies
Leases
Leases of property, plant and equipment where the group, as a lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are recognised as assets and liabilities in the balance sheet at the commencement of lease term at the lower of the fair value of the leased property and the present value of the minimum lease payments.
Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in other non-current debt. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term.
Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made as a lessee under operating leases are charged to the income statement on a straight-line basis over the period of the lease.

5.3 | Financial assets and liabilities by category

Financial assets and liabilities recognised in the balance sheet include cash and cash equivalents, loans and other financial receivables, investments in securities, trade receivables, trade payables, loans and derivatives.
Classification of financial assets into different measurement categories depends on the purpose for which the financial assets were initially acquired and is determined at the acquisition date. Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

Financial assets and liabilities by category at the end of 2016

| FAIR VALUE | AVAILABLE-FOR- |  | DERIVATIVES | FINANCIAL |
| THROUGH PROFIT | SALE FINANCIAL | LOANS AND | USED FOR | LIABILITIES AT |
EURm | AND LOSS | ASSETS | RECEIVABLES | HEDGING | AMORTISED COST | TOTAL
Energy shareholdings | – | 1,932 | – | – | – | 1,932
Other non-current financial assets: |  |  |  |  |  |
Loans and receivables | – | – | 19 | – | – | 19
Derivatives | 18 | – | – | 218 | – | 236
|  |  |  |  |  | 255
Trade and other receivables | – | – | 1,726 | – | – | 1,726
Other current financial assets: |  |  |  |  |  |
Loans and receivables | – | – | 6 | – | – | 6
Derivatives | 47 | – | – | 56 | – | 103
|  |  |  |  |  | 109
Total financial assets | 65 | 1,932 | 1,751 | 274 | – | 4,022
Non-current debt: |  |  |  |  |  |
Loans | – | – | – | – | 1,800 | 1,800
Derivatives | – | – | – | 34 | – | 34
|  |  |  |  |  | 1,835
Other non-current financial liabilities: |  |  |  |  |  |
Other liabilities 1) | – | – | – | – | 94 | 94
Derivatives | 10 | – | – | 6 | – | 16
|  |  |  |  |  | 110
Current debt: |  |  |  |  |  |
Loans | – | – | – | – | 502 | 502
Derivatives | 82 | – | – | – | – | 82
|  |  |  |  |  | 584
Trade and other payables | – | – | – | – | 1,594 | 1,594
Other current financial liabilities: |  |  |  |  |  |
Derivatives | 20 | – | – | 96 | – | 116
|  |  |  |  |  | 116
Total financial liabilities | 112 | – | – | 136 | 3,990 | 4,238

Financial assets and liabilities by category at the end of 2015

| FAIR VALUE | AVAILABLE-FOR- |  | DERIVATIVES | FINANCIAL |
| THROUGH PROFIT | SALE FINANCIAL | LOANS AND | USED FOR | LIABILITIES AT |
EURm | AND LOSS | ASSETS | RECEIVABLES | HEDGING | AMORTISED COST | TOTAL
Energy shareholdings | – | 2,085 | – | – | – | 2,085
Other non-current financial assets: |  |  |  |  |  |
Loans and receivables | – | – | 20 | – | – | 20
Derivatives | 20 | – | – | 292 | – | 312
|  |  |  |  |  | 332
Trade and other receivables | – | – | 1,743 | – | – | 1,743
Other current financial assets: |  |  |  |  |  |
Loans and receivables | – | – | 5 | – | – | 5
Derivatives | 49 | – | – | 79 | – | 128
|  |  |  |  |  | 133
Total financial assets | 69 | 2,085 | 1,768 | 371 | – | 4,293
Non-current debt: |  |  |  |  |  |
Loans | – | – | – | – | 2,726 | 2,726
Derivatives | 30 | – | – | 41 | – | 71
|  |  |  |  |  | 2,797
Other non-current financial liabilities: |  |  |  |  |  |
Other liabilities 1) | – | – | – | – | 103 | 103
Derivatives | 30 | – | – | 41 | – | 71
|  |  |  |  |  | 174
Current debt: |  |  |  |  |  |
Loans | – | – | – | – | 248 | 248
Derivatives | 21 | – | – | – | – | 21
|  |  |  |  |  | 269
Trade and other payables | – | – | – | – | 1,463 | 1,463
Other current financial liabilities: |  |  |  |  |  |
Derivatives | 40 | – | – | 116 | – | 156
|  |  |  |  |  | 156
Total financial liabilities | 121 | – | – | 198 | 4,540 | 4,859

1) | Consists mainly of non-current advances received and a put liability that is not estimated to mature within 12 months.

The carrying amounts of financial assets and financial liabilities except for non-current loans approximate their fair value. The fair value of non-current loans amounted to EUR 1,804 million (2,755 million) at the end of 2016. For quoted bonds, the fair values are based on the quoted market value as of 31 December. At the end of 2016, all bonds were quoted. For other non-current borrowings fair values are estimated using the expected contractual future payments discounted at market interest rates and are categorised within level 2 of the fair value hierarchy.
• Refer Note 5.2 Net debt, for further information on net debt and bonds.
Fair value measurement hierarchy for financial assets and liabilities

EURm |  | 2016 |  |  |  | 2015 |  |
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total
Financial assets |  |  |  |  |  |  |  |
Derivatives, non-qualifying hedges | 2 | 63 | – | 65 | 6 | 63 | – | 69
Derivatives used for hedging | 32 | 241 | – | 273 | 88 | 283 | – | 371
Energy shareholdings | – | – | 1,932 | 1,932 | – | – | 2,085 | 2,085
Total | 34 | 304 | 1,932 | 2,270 | 94 | 346 | 2,085 | 2,525
Financial liabilities |  |  |  |  |  |  |  |
Derivatives, non-qualifying hedges | 19 | 93 | – | 112 | 59 | 62 | – | 121
Derivatives used for hedging | 42 | 94 | – | 136 | 109 | 89 | – | 198
Total | 61 | 187 | – | 248 | 168 | 151 | – | 319

There have been no transfers between levels in 2016 and 2015.

Accounting policies
Fair value through profit or loss
This category includes derivatives that don’t qualify hedge accounting. They are measured at fair value and any gains or losses from subsequent measurement are recognised in the income statement.
Available-for-sale financial assets
This category includes mainly UPM’s energy shareholdings. These assets are measured at fair value through other comprehensive income.
Loans and receivables
This category comprises loan receivables with fixed or determinable payments that are not quoted in an active market, as well as trade and other receivables. They are included in non-current assets unless they mature within 12 months of the balance sheet date. Loan receivables that have a fixed maturity are measured at amortised cost using the effective interest method. Loan receivables without fixed maturity date are measured at amortised cost. Loan receivables are impaired if the carrying amount is greater than the estimated recoverable amount.
Derivatives used for hedging
All derivatives are initially and continuously recognised at fair value in the balance sheet. Gains and losses on remeasurement of derivatives used for hedging purposes are recognised in accordance with the accounting principles described in » Note 6.2 Derivatives and hedge accounting.
Financial liabilities measured at amortised cost
This category includes debt, trade payables and other financial liabilities. » Refer Note 5.2 Net debt, for further information.
The different levels of fair value hierarchy used in fair value estimation are defined as follows:
Fair values under level 1
Quoted prices (unadjusted) traded in active markets for identical assets or liabilities. Derivatives include futures and commodity forwards traded in exchange.
Fair values under level 2
Observable inputs are used as basis for fair value calculations either directly (prices) or indirectly (derived from prices). If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. Derivatives, level 2 include OTC derivatives like forward foreign exchange contracts, foreign currency options, interest and currency swaps and commodity swaps.
Specific valuation techniques used to value financial instruments at level 2 include the following methods:
Interest forward rate agreements (FRA) are fair valued based on quoted market rates on the balance sheet date. Forward foreign exchange contracts are fair valued based on the contract forward rates at the balance sheet date. Foreign currency options are fair valued based on quoted market rates and market volatility rates on the balance sheet date by using the Black&Scholes option valuation model. Interest and currency swap instruments are fair valued as present value of the estimated future cash flows based on observable yield curves. Commodity swaps are fair valued based on forward curve quotations received from service providers.
An embedded derivative that is by nature a foreign currency forward contract is valuated at market forward exchange rates and is included in level 2. Embedded derivatives are monitored by the group and the fair value changes are reported in other operating income in the income statement.
Fair values under level 3
Financial assets or liabilities of which fair values are not based on observable market data (that is, unobservable inputs) are classified under level 3. This category include UPM’s energy shareholdings and forest assets. Fair valuations are performed at least quarterly by respective business areas or functions. Fair valuations are reviewed by the group finance management and overseen by the Audit Committee .

• | Refer Note 4.3 Energy shareholdings and Note 4.2 Forest assets.

5.4 Financial income and expenses

EURm | 2016 | 2015
Exchange rate and fair value gains and |  |
losses |  |
Derivatives, non-qualifying hedges | –47 | 85
Fair value gains and losses on derivatives |  |
designated as fair value hedges | –64 | –13
Fair value adjustment of debt attributable to |  |
interest rate risk | 55 | 5
Fair value adjustment of firm commitments |  |
attributable to foreign exchange rate risk | – | 3
Exchange gains and losses on financial |  |
liabilities measured at amortised costs | 13 | –105
Exchange gains and losses on loans and |  |
receivables | 36 | 13
Other exchange rate and fair value gains and |  |
losses | – | 13
| –7 | 1
Interest and other finance costs, net |  |
Interest expense on financial liabilities |  |
measured at amortised cost | –111 | –122
Interest income on derivatives | 60 | 75
Interest income on loans and receivables | 4 | 5
Dividend income from energy shareholdings | 2 | –
Losses on sale of associates and joint ventures | –4 | –
Other financial expenses, net | – | –26
| –49 | –68
Total | –56 | –67

Net gains and losses on derivatives included in the operating profit

EURm | 2016 | 2015 |
Cash flow hedges reclassified from hedging |  |  |
reserve | –38 | –107 |
Cash flow hedges recognised directly in |  |  |
operating profit | –4 | 6 |
Non-qualifying hedges | 28 | –78 |
Total | –14 | –179 |

Foreign exchange gains and losses in the income statement excluding non-qualifying hedges

EURm | 2016 | 2015
Sales | 9 | –100
Other operating income | 6 | 18
Financial income and expenses | 3 | 6
Total | 17 | –76

Share capital

| 2016 | 2015
Number of shares (1,000) | 533,736 | 533,736
Share capital, EURm | 890 | 890

Treasury shares
At 31 December 2016, the company held 230,737 (230,737) of its own shares, 0.04% (0.04%) of the total number of shares.
Reserves

EURm | 2016 | 2015
Fair value reserve | 1,438 | 1,582
Hedging reserves | –31 | –104
Share-based payments reserve | 9 | 8
Total other reserves | 1,416 | 1,486
Reserve for invested non-restricted equity | 1,273 | 1,273
Translation reserve | 433 | 449
Total reserves | 3,122 | 3,208

Reserve for invested non-restricted equity
Reserve for invested non-restricted equity includes, under the Companies’ Act, the exercise value of shareholders’ investments in the company unless otherwise decided by the company.
Translation reserve
This reserve includes the foreign currency differences arising from the translation of foreign operations, and the effective result of transactions that hedge the group’s net investments in foreign operations.
Hedging reserve
This reserve comprises the cumulative net change in the fair value of the effective portion of cash flow hedging instruments related to hedged transactions that have not yet occurred. Amounts are recognised in profit or loss when the associated hedged transactions affect profit or loss or as part of the acquisition cost of property, plant and equipment.
Fair value reserve
This reserve represents the cumulative net change in the fair value of investments in equity securities comprising mainly of the fair value change of the energy shareholdings. Amounts are recognised in profit or loss if the asset is sold or impaired.
Share-based payments reserve
The share-based payments reserve is used to recognise the fair value of the share incentive plans, Performance Share Plan and Deferred Bonus Plan, over their vesting period.
5.5 Share capital and reserves
The company has one series of shares and each share carries one vote. There are no specific terms related to the shares except for the redemption clause as discussed under » Shares section in the Report of the Board of Directors. At 31 December 2016, the number of the company’s shares was 533,735,699. The shares do not have any nominal counter value. The shares are included within the book entry system for securities.
Accounting policies
Transaction costs directly relating to the issue of new shares are recognised, net of tax, in equity as a reduction in the proceeds. Where any group company purchases the parent company’s shares (treasury shares), the consideration paid, including any directly attributable incremental costs (net of tax), is deducted from equity attributable to the owners of the parent company until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the owners of the parent company.

6. | Risk management

6.1 Financial risk management
The objective of financial risk management is to protect the group from unfavourable changes in financial markets and thus help to secure profitability. The objectives and limits for financing activities are defined in the Group Treasury Policy approved by the Board of Directors. In financial risk management various financial instruments are used within the limits specified in the Group Treasury Policy. Only such instruments whose market value and risk profile can be continuously and reliably monitored are used for this purpose.
Financing services are provided to the group entities and financial risk management carried out by the central treasury department, Treasury and Risk Management. The centralisation of treasury functions enables efficient financial risk management, cost-efficiency and efficient cash management.
Foreign exchange risk
The group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to USD, GBP and JPY. Foreign exchange risk arises from contracted and expected commercial future payment flows (transaction exposure), from changes in value of recognised assets and liabilities denominated in foreign currency and from changes in the value of assets and liabilities in foreign subsidiaries (translation exposure). The objective of foreign exchange risk management is to limit the uncertainty created by changes in foreign exchange rates on the future value of cash flows and earnings as well as in the group’s balance sheet by hedging foreign exchange risk in forecast cash flows and balance sheet exposures. Changing exchange rates can also have indirect effects, such as change in relative competitiveness between currency regions.
Transaction exposure
The group hedges transaction exposure related to highly probable future commercial foreign currency cash flows on a rolling basis over the next 12-month period based on forecasts by the respective business areas. The group’s policy is to hedge an average of 50% of its estimated net risk currency cash flow. Some highly probable cash flows have been hedged for longer than 12 months ahead while deviating from the risk neutral hedging level at the same time. At 31 December 2016, 50% (49%) of the forecast 12-month currency flow was hedged.
External forwards are designated at group level as hedges of foreign exchange risk of specific future foreign currency sales. Cash flow hedge accounting is applied when possible. If hedge accounting is not possible, fair value changes of the hedging instrument are recognised through profit and loss immediately.
At the end of 2016, UPM’s estimated net risk currency flow for the next 12 months was EUR 1,730 million (1,930 million).
12 months net risk currency flow

EURm | 2016 | 2015
USD | 1,060 | 1,010
GBP | 370 | 600
JPY | 210 | 230
Others | 90 | 90

Translation exposure
The group has several currency denominated assets and liabilities on its balance sheet such as foreign currency bonds, loans and deposits, group internal loans and cash in other currencies than functional currencies. The aim is to hedge this balance sheet exposure fully. The group might, however, within the limits set in the group Treasury Policy have unhedged balance sheet exposures. At 31 December 2016 unhedged balance sheet exposures in net of interest-bearing assets and liabilities amounted to EUR 15 million (11 million). Hedge accounting is not applied and all fair value changes of hedging instruments are recognised through profit and loss immediately.
The group has also accounts receivable and payable balances denominated in foreign currencies. The aim is to hedge the exposure in main currencies. The nominal values of the hedging instruments in net of accounts payable and receivable hedging were EUR 555 million (770 million). Hedge accounting is not applied and all fair value changes of hedging instruments are recognised through profit and loss immediately.
The group has net investments in foreign subsidiaries that are subject to foreign currency translation differences. The exchange rate differences arising from translation of foreign subsidiaries and accumulated as a separate component of equity in the translation reserve relate mainly to USD, CNY and GBP. Currency exposure arising from the net investment in foreign subsidiaries is generally not hedged. However, at 31 December 2016, part of the foreign exchange risk associated with the net investment in Uruguay was hedged and net investment hedge accounting has been applied.
Foreign exchange risk sensitivity
The following table illustrates the effect to profit before tax due to recognised balance sheet items in foreign currency and the effect to equity arising mainly from foreign currency forwards used to hedge foreign currency flows.

| Profit before tax | Equity
EURm | 2016 | 2015 | 2016 | 2015
EUR strengthens by 10% |  |  |  |
USD | 6 | 10 | 52 | 41
GBP | –1 | – | 19 | 28
JPY | –2 | –2 | 10 | 19
EUR weakens by 10% |  |  |  |
USD | –6 | –10 | –52 | –41
GBP | 1 | – | –19 | –28
JPY | 2 | 2 | –10 | –19

The following assumptions were made when calculating the sensitivity to changes in the foreign exchange risk:

• | Major part of non-derivative financial instruments (such as cash and cash equivalents, trade receivables, debt and trade payables) are either directly denominated in the functional currency or are transferred to the functional currency through the use of derivatives i.e. the balance sheet position is close to zero. Exchange rate fluctuations have therefore minor or no effects on profit or loss.

• | The position includes foreign currency forward contracts that are part of the effective cash flow hedge having an effect on equity.

• | The position includes also foreign currency forward contracts that are not part of the effective cash flow hedge having an effect on profit.

• | The position excludes foreign currency denominated future cash flows and effects of translation exposure and related hedges.

Interest rate risk
The interest-bearing liabilities and assets expose the group to interest rate risk, namely repricing and fair value interest rate risk caused by interest rate movements. According to the Group Treasury Policy the interest rate exposure is defined as the difference in interest rate sensitivity between assets and liabilities compared to a benchmark portfolio. The total interest rate exposure is a net debt portfolio which includes all interest bearing assets and liabilities and derivatives that are used to hedge the aforementioned balance sheet items. The policy sets target net debt duration levels within an allowed limit. The group uses interest rate derivatives to change the duration of the net debt. At 31 December 2016 the average duration was 3.1 years (2.2 years).
The table below shows the nominal value of interest rate position exposed to interest rate risk in each significant currency. The position includes all cash balances, interest bearing liabilities and assets and currency derivatives used to hedge these items. The positive/negative position indicates a net liability/asset position by currency and that the group is exposed to repricing and/or fair value interest risk by interest rate movements in that currency.
Nominal values of the group’s net debt by currency including derivative

EURbn | 2016 | 2015
EUR | 0.9 | 1.9
USD | 0.4 | 0.5
GBP | –0.1 | –0.2
Others | –0.1 | –0.1
Total | 1.1 | 2.1

Most of the long-term loans and the related interest rate derivatives meet hedge accounting requirements; both fair value and cash flow hedge accounting is applied.
Interest rate risk sensitivity
The following table illustrates the effect to profit before tax mainly as a result of higher/lower interest expense on floating rate debt and the effect to equity as a result of a decrease/increase in the fair value of derivatives designated as cash flow hedges of floating rate debt.

| Profit before tax | Equity
EURm | 2016 | 2015 | 2016 | 2015
Interest rate of net debt 100 |  |  |  |
basis points higher | –7 | –5 | –37 | –40
Interest rate of net debt 100 |  |  |  |
basis points lower | 7 | 5 | 37 | 40

The following assumptions were made when calculating the sensitivity to changes in interest rates:

• | The variation of interest rate is assumed to be 100 basis points parallel shift in applicable interest rate curves.

• | In the case of fair value hedges designated for hedging interest rate risk, the changes in the fair values of the hedged items and the hedging instruments attributable to the interest rate movements balance out almost completely in the income statement in the same period. However, the possible ineffectiveness has an effect on the profit of the year .

• | Fixed rate debt that is measured at amortised cost and is not designated to fair value hedge relationship is not subject to interest rate risk sensiti-vity.

• | In case of variable to fixed interest rate swaps which are included in cash flow hedge accounting, fair value changes of hedging swaps are booked to equity.

• | Floating rate debt that are measured at amortised cost and not desig-nated as hedged items are included in interest rate sensitivity analysis.

• | Changes in the market interest rate of interest rate derivatives (interest rate futures, swaps and cross currency swaps) that are not designated as hedging instruments in hedge accounting affect the financial income or expenses (net gains or losses from remeasurement of the financial assets and liabilities to fair value) and are therefore included in the income-related sensitivity analysis.

Electricity price risk
UPM is hedging both sales of power production and power purchases consumed at daily business. The group’s sensitivity to electricity market price is dependent on the electricity production and consumption levels and the hedging levels.
In the Nordic and Central European market areas the operative risk management is done by entering into electricity derivatives contracts. In addition to hedging, the group is also trading electricity forwards and futures. As well as hedging, proprietary trading risks are monitored on a daily basis. Value-At-Risk levels are set to limit the maximum risk at any given time. Cumulative maximum loss is limited by stop-loss limits.
Electricity derivatives price sensitivity
Sensitivity analysis for financial electricity derivatives is based on position at the end of financial year. Sensitivities change over time as the overall hedging and trading positions change. Underlying physical positions are not included in the sensitivity analysis. Sensitivity analysis is calculated separately for the hedge accounted and non-hedge accounted volumes. In the analysis it is assumed that forward quotation in Nasdaq Commodities and EEX would change EUR 5/ MWh throughout the period UPM has derivatives. EUR 5/ MWh price sensitivity is estimated from historical market price movements in Nasdaq and EEX markets.

EURm | EFFECT | 2016 | 2015
+/– EUR 5/MWh in electricity forward |  |  |
quotations |  |  |
Effect on profit before tax | +/– | 45.1 | 66.0
Effect on equity | +/– | 36.7 | 28.0

6.2 Derivatives and hedge accounting
The group uses financial derivatives to manage currency, interest rate and commodity price risks. » Refer Note 6.1 Financial risk management.
Accounting policies
All derivatives are initially and continuously recognised at fair value in the balance sheet. The fair value gain or loss is recognised through the income statement or other comprehensive income depending on whether the derivative is designated as a hedging instrument, and on the nature of the item being hedged. Certain derivatives are designated at inception either hedges of the fair value of a recognised assets or liabilities or a firm commitment (fair value hedge), hedges of highly probable forecasted transactions or cash flow variability in functional currency (cash flow hedge), or hedges of net investments in foreign subsidiaries with other than the EUR as their functional currency (net investment hedge). Derivative fair values on the balance sheet are classified as non-current when the remaining maturity is more than 12 months and as current when the remaining maturity is less than 12 months.
For hedge accounting purposes, UPM documents the relationship between the hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions at the inception date. This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions. The group also documents its assessment, both at the hedge inception and on an on-going basis, as to whether the hedge is highly effective in offsetting changes in fair values or cash flows of the hedged items.
Certain derivatives, while considered to be economical hedges for UPM’s financial risk management purposes, do not qualify for hedge accounting. Such derivatives are recognised at fair value through the income statement in other operating income or under financial items.
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. Amounts deferred in equity are transferred to the income statement and classified as income or expense in the same period as that in which the hedged item affects the income statement (for example, when the forecast external sale to the group that is hedged takes place). The period when the hedging reserve is released to sales after each derivative has matured is approximately one month. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement within finance costs. When the forecasted transaction that is hedged resultsin the recognition of a fixed asset, gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the acquisition cost and depreciated over the useful lives of the assets.
When a hedging instrument expires or is sold, or when a hedge no longer meets hedge accounting criteria, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the committed or forecasted transaction is ultimately recognised in the income statement. However, if a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately recognised to the income statement.
Hedges of net investments in foreign subsidiaries
The fair value changes of forward exchange contracts used in hedging net investments that reflect the change in spot exchange rates are recognised in other comprehensive income within translation reserve. Any gain or loss relating to the interest portion of forward exchange contracts is recognised immediately in the income statement underfinancial items. Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold.
Fair value hedges
The group applies fair value hedge accounting for hedging fixed interest risk on debt. Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective both prospectively and retrospectively are recorded in the income statement under financial items, along with any changes in the fair value of the hedged asset or liabilities that are attributable to the hedged risk.
The carrying amounts of hedged items and the fair values of hedging instruments are included in interest-bearing assets or liabilities. Derivatives that are designated and qualify as fair value hedges mature at the same time as hedged items. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the expected period to maturity.
Financial counterparty risk
The financial instruments the group has agreed with banks and financial institutions contain an element of risk of the counterparties being unability to meet their obligations. According to the Group Treasury Policy derivative instruments and investments of cash funds may be made only with counterparties meeting certain creditworthiness criteria. The group minimises counterparty risk also by using a number of major banks and financial institutions. Creditworthiness of counterparties is constantly monitored by Treasury and Risk Management.
Net fair values of derivatives

| Positive | Negative | Net | Positive | Negative | Net
| fair values | fair values | fair values | fair values | fair values | fair values
EURm |  | 2016 |  |  | 2015 |
Foreign exchange risk |  |  |  |  |  |
Forward foreign exchange contracts |  |  |  |  |  |
Cash flow hedges | 35 | –41 | –6 | 17 | –27 | –10
Net investment hedge | 4 | –19 | –15 | – | –21 | –21
Non-qualifying hedges | 10 | –14 | –4 | 14 | –14 | –
Currency options |  |  |  |  |  |
Non-qualifying hedges | – | – | – | – | – | –
Cross currency swaps |  |  |  |  |  |
Non-qualifying hedges | 23 | –77 | –54 | 15 | –46 | –31
Derivatives hedging foreign exchange risk | 72 | –151 | –79 | 46 | –108 | –62
Interest rate risk |  |  |  |  |  |
Interest rate swaps |  |  |  |  |  |
Cash flow hedges | – | –34 | –34 | – | –18 | –18
Fair value hedges | 138 | – | 138 | 181 | – | 181
Non-qualifying hedges | 27 | –2 | 25 | 31 | –2 | 29
Cross currency swaps |  |  |  |  |  |
Cash flow hedges | – | – | – | – | –23 | –23
Fair value hedges | 64 | – | 64 | 85 | – | 85
Non-qualifying hedges | 1 | – | 1 | 1 | – | 1
Derivatives hedging interest risk | 230 | –36 | 194 | 298 | –43 | 255
Commodity risk |  |  |  |  |  |
Commodity contracts |  |  |  |  |  |
Cash flow hedges | 32 | –42 | –10 | 88 | –109 | –21
Non-qualifying hedges | 5 | –19 | –14 | 8 | –59 | –51
Derivatives hedging commodity risk | 37 | –61 | –24 | 96 | –168 | –72
Total | 339 | –248 | 91 | 440 | –319 | 121

No derivatives are subject to offsetting in the group’s financial statements. All derivatives are under ISDA or similar master netting agreement.
Notional amounts of derivatives

EURm | 2016 | 2015
Interest rate forward contracts | 1,480 | 1,906
Interest rate swaps | 2,019 | 2,131
Forward foreign exchange contracts | 2,645 | 2,949
Currency options | 36 | 73
Cross currency swaps | 557 | 669
Commodity contracts | 429 | 400

Net fair values of derivatives calculated b Notional amounts of derivatives by counterparty

|  | POSITIVE | NEGATIVE | NET
| EURm | FAIR VALUES | FAIR VALUES | FAIR VALUES
| 2016 | 238 | –148 | 90
| 2015 | 250 | –129 | 121

Cash collaterals pledged for derivative contracts totalled EUR19 million of which EUR 17 million relate to commodity contracts and EUR 2 million to interest rate forward contracts.

7. | Income tax

7.1 Tax on profit for the year
Income tax
In 2016, tax on profit for the year amounted to EUR 200 million (159 million). The effective tax rate was 18.5% (14.8%). In 2016 and 2015, the effective tax rate was affected by the income not subject to tax from subsidiaries operating in tax free zone.
In 2015, other items include tax benefit of EUR 9 million related to capital gain from sale of forestland in UK in 2014 where tax authorities accepted treatment of gain as tax-exempt in 2015.
Income tax

EURm | 2016 | 2015
Current tax expense | 172 | 95
Change in deferred taxes | 28 | 64
Total | 200 | 159

Tax rate reconciliation

EURm | 2016 |  | 2015 |
Profit before tax | 1,080 |  | 1,075 |
Computed tax at Finnish statutory rate 20% | 216 |  | 215 |
Difference between Finnish and foreign rates | 21 |  | 16 |
Non-deductible expenses and tax-exempt |  |
income | –23 |  | –63 |
Tax loss with no tax benefit | 8 |  | 11 |
Results of associates | –1 |  | –1 |
Change in tax legislation | –4 |  | –1 |
Change in recoverability of deferred tax assets | –1 |  | – |
Utilisation of previously unrecognised tax |  |
losses | –11 |  | –6 |
Other items | –5 |  | –12 |
Total income taxes | 200 |  | 159 |
Effective tax rate, % | 18.5 | % | 14.8 | %

Accounting policies
The group’s income tax expense comprises current tax and deferred tax. Current tax is calculated on the taxable result for the period based on the tax rules prevailing in the countries where the group operates and includes tax adjustments for previous periods and withholding taxes deducted at source on intra-group transactions. Tax expense is recognised in the income statement, unless it relates to items that have been recognised in equity or as part of other comprehensive income. In these instances, the related tax expense is also recognised in equity or other comprehensive income, respectively.
7.2 Deferred tax

EURm |  | 2016 | 2015
Deferred tax assets |  |
Intangible assets and property, plant and |  |
equipment | 107 | 132
Inventories | 42 | 37
Retirement benefit liabilities and provisions | 145 | 129
Other temporary differences | 23 | 50
Tax losses and tax credits carried forward | 226 | 241
Offset against liabilities | –97 | –123
Total |  | 446 | 466
Deferred tax liabilities |  |
Intangible assets and property, plant and |  |
equipment | –206 | –217
Forest assets | –261 | –256
Retirement benefit assets | –14 | –19
Other temporary differences | –73 | –87
Offset against assets | 97 | 123
Total |  | –457 | –456
Net deferred tax assets (liabilities) | –11 | 10

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority.
Movements in deferred tax assets and liabilities

EURm | 2016 | 2015
Carrying value, at 1 January | 10 | 104
Charged to income statement | –28 | –64
Charged to other comprehensive income | 9 | –29
Exchange rate adjustments | –2 | –1
Net deferred tax assets (liabilities) | –11 | 10

Tax charge to other comprehensive income

EURm | 2016 | 2015
| Before tax | Tax | After tax | Before tax | Tax | After tax
Actuarial gains and losses on defined benefit plans | –120 | 23 | –97 | 153 | –40 | 113
Energy shareholdings | –148 | 3 | –144 | –424 | 19 | –405
Translation differences | –14 | – | –14 | 221 | – | 221
Cash flow hedges | 91 | –18 | 73 | 30 | –6 | 24
Net investment hedges | –1 | – | –1 | –26 | –2 | –28
Total | –193 | 9 | –184 | –46 | –29 | –75

Key estimates and judgements
Recognised deferred tax assets
The recognition of deferred tax assets requires management judgement as to whether it is probable that such balances will be utilised and/or reversed in the foreseeable future. At 31 December 2016, net operating loss carry-forwards for which the group has recognised a deferred tax asset amounted to EUR 744 million (797 million), of which EUR 622 million (665 million) was attributable to German subsidiaries. In Germany net operating loss carry-forwards do not expire. In other countries net operating loss carry-forwards expire at various dates and in varying amounts. Based on profit forecasts, it is probable that there will be sufficient future taxable profits available against which the tax losses can be utilised.
The assumptions regarding future realisation of tax benefits, and therefore the recognition of deferred tax assets, may change due to future operating performance of the group, as well as other factors, some of which are outside of the control of the group.
Unrecognised deferred tax assets and liabilities
The net operating loss carry-forwards for which no deferred tax is recognised due to uncertainty of their utilisation amounted to EUR 842 million (648 million) in 2016. These net operating loss carry-forwards are mainly attributable to certain German and French subsidiaries. In addition, the group has not recognised deferred tax assets on loss carry-forwards amounting to EUR 450 (423 million) which relate to closed Miramichi paper mill in Canada.
The group has not recognised deferred tax liability in respect of undistributed earnings of non-Finnish subsidiaries to the extent that it is probable that the temporary differences will not reverse in the foreseeable future.
In addition, the group has not recognised deferred tax liability for the undistributed earnings of Finnish subsidiaries and associates as such earnings can be distributed without any tax consequences.
Accounting policies
Deferred tax is calculated based on temporary differences between the carrying amounts and the taxable values of assets and liabilities and for tax loss carry-forwards to the extent that it is probable that these can be utilized against future taxable profits.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are recognised net where there is a legal right to set-off and an intention to settle on a net basis.

8. | Group structure

8.1 Business acquisitions and disposals
In 2016 and 2015, no business acquisitions were made.
In 2016, UPM had no business disposals. In 2015, UPM sold 100% of its shares of Tilhill Forestry Ltd to BSW Timber Ltd in the UK. The following table summarises the amount of assets and liabilities related to disposal.

EURm | 2015
Inventories | 5
Trade and other receivables | 24
Cash and cash equivalents | 3
Provisions | –2
Trade and other payables | –22
Net assets | 8
Gain on disposals | 3
Total consideration | 11
Settled in cash and cash equivalents | 11
Cash in subsidiaries disposed | –3
Net cash arising from disposals | 8

Accounting policies
UPM consolidates acquired entities at the acquisition date which is when it gains control using the acquisition method. Consideration transferred is determined as the fair value of the assets transferred, the liabilities incurred and equity instruments issued including the fair value of a contingent consideration. Acquisition related transaction costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed are measured initially at their fair values at the acquisition date. The group measures any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets of the subsidiary acquired is recorded as goodwill.
8.2 Principal subsidiaries and joint operations

|  | COUNTRY OF | HOLDING % | HOLDING %
SUBSIDIARIES | INCORPORATION | 2016 | 2015
Blandin Paper Company | US | 100.00 | 100.00
Forestal Oriental S.A. | UY | 100.00 | 100.00
Gebrüder Lang GmbH Papierfabrik | DE | 100.00 | 100.00
LLC UPM Ukraine | UA | 100.00 | 100.00
MD Papier GmbH | DE | 100.00 | 100.00
Nordland Papier GmbH | DE | 100.00 | 100.00
NorService GmbH | DE | 100.00 | 100.00
nortrans Speditionsgesellschaft mbH | DE | 100.00 | 100.00
OOO UPM-Kymmene | RU | 100.00 | 100.00
OOO UPM-Kymmene Chudovo | RU | 100.00 | 100.00
PT UPM Raflatac Indonesia | ID | 100.00 | 100.00
Rhein Papier GmbH | DE | 100.00 | 100.00
Steyrermühl Sägewerksgesellschaft m.b.H. Nfg KG | AT | 100.00 | 100.00
UPM (China) Co., Ltd | CN | 100.00 | 100.00
UPM (Vietnam) Ltd | VN | 100.00 | 100.00
UPM AS |  | EE | 100.00 | 100.00
UPM Asia Pacific Pte. Ltd | SG | 100.00 | 100.00
UPM Energy Oy | FI | 100.00 | –
UPM France S.A.S. | FR | 100.00 | 100.00
UPM GmbH | DE | 100.00 | 100.00
UPM Manufatura e Comércio de Produtos Florestais Ltda | BR | 100.00 | 100.00
UPM Paper ENA Oy | FI | 100.00 | –
UPM Plywood Oy 1) | FI | 100.00 | 100.00
UPM Pulp Sales Oy | FI | 100.00 | 100.00
UPM Raflatac (China) Co., Ltd | CN | 100.00 | 100.00
UPM Raflatac (S) Pte Ltd | SG | 100.00 | 100.00
UPM Raflatac Co., Ltd | TH | 100.00 | 100.00
UPM Raflatac Iberica S.A. | ES | 100.00 | 100.00
UPM Raflatac Inc. | US | 100.00 | 100.00
UPM Raflatac Mexico S.A. de C.V. | MX | 100.00 | 100.00
UPM Raflatac NZ Limited | NZ | 100.00 | 100.00
UPM Raflatac Oy | FI | 100.00 | 100.00
UPM Raflatac Pty Ltd | AU | 100.00 | 100.00
UPM Raflatac s.r.l. | AR | 100.00 | 100.00
UPM Raflatac Sdn. Bhd. | MY | 100.00 | 100.00
UPM Raflatac South Africa (Pty) Ltd | ZA | 100.00 | 100.00
UPM Raflatac Sp.z.o.o. | PL | 100.00 | 100.00
UPM S.A. |  | UY | 91.00 | 91.00
UPM Sales GmbH | DE | 100.00 | 100.00
UPM Sales Oy | FI | 100.00 | 100.00
UPM Silvesta Oy | FI | 100.00 | 100.00
UPM Specialty Papers Oy 1) | FI | 100.00 | –
UPM Sähkönsiirto Oy | FI | 100.00 | 100.00
UPM-Kymmene (UK) Ltd | GB | 100.00 | 100.00
UPM-Kymmene AB | SE | 100.00 | 100.00
UPM-Kymmene Austria GmbH | AT | 100.00 | 100.00
UPM-Kymmene B.V. | NL | 100.00 | 100.00
UPM-Kymmene Inc. | US | 100.00 | 100.00
UPM-Kymmene India Private Limited | IN | 100.00 | 100.00
UPM-Kymmene Japan K.K. | JP | 100.00 | 100.00
UPM-Kymmene Kagit Urunleri Sanayi ve Ticaret Ltd. Sti. | TR | 99.99 | 99.99
UPM-Kymmene Otepää AS | EE | 100.00 | 100.00
UPM-Kymmene S.A. | ES | 100.00 | 100.00
UPM-Kymmene Seven Seas Oy | FI | 100.00 | 100.00
UPM-Kymmene S.r.l. | IT | 100.00 | 100.00
Werla Insurance Company Ltd | MT | 100.00 | 100.00

1) | UPM-Kymmene Wood Oy’s legal company name has changed to UPM Plywood Oy and UPM Paper Asia Oy’s legal company name has changed to UPM Specialty Papers Oy as of 1 February 2017.

The table includes subsidiaries with sales exceeding EUR 2 million in 2016.

| COUNTRY OF | HOLDING % | HOLDING %
JOINT OPERATIONS | INCORPORATION | 2016 | 2015
Oy Alholmens Kraft Ab (Pohjolan Voima Oy, G series) | FI | 27.88 | 27.88
EEVG Entsorgungs- und Energieverwertungs-gesellschaft m.b.H. | AT | 50.00 | 50.00
Järvi-Suomen Voima Oy | FI | 50.00 | 50.00
Kainuun Voima Oy | FI | 50.00 | 50.00
Kaukaan Voima Oy (Pohjolan Voima Oy, G9 series) | FI | 54.00 | 54.00
Kymin Voima Oy (Pohjolan Voima Oy, G2 series) | FI | 76.00 | 76.00
Madison Paper Industries | US | 50.00 | 50.00
Rauman Biovoima Oy (Pohjolan Voima Oy, G4 series) | FI | 71.95 | 71.95

In 2016, UPM changed its corporate structure in Finland to better match its current business structure. Three new subsidiaries were established in Finland: UPM Energy Oy, UPM Paper Asia Oy and UPM Paper ENA Oy. The personnel and assets of UPM Energy, UPM Specialty Papers and UPM Paper ENA (Europe & North America) in Finland were transferred to the new companies on 1 July 2016. UPM Raflatac and UPM Plywood already operated in their own subsidiaries in Finland. Assets and personnel of UPM Biorefining continued to remain part of UPM-Kymmene Corporation.
8.3 Related party transactions
The Board of Directors and the Group Executive Team
There have not been any material transactions between UPM and its members of the Board of Directors or the Group Executive Team (key management personnel) or persons closely associated with these members or organisations in which these individuals have control or significant influence. There are no loans granted to any members of the Board of Directors or the Group Executive Team at 31 December 2016 and 2015.
For information concerning shares held by members of the Board of Directors and members of the Group Executive Team, as well as remuneration to members of the Board of Directors and the Group Executive Team are disclosed in » Note 3.2. Key management personnel.
Associates and joint ventures
In Finland, the group organises its producer’s responsibility of recovered paper collection through Paperinkeräys Oy. Austria Papier Recycling GmbH purchases recovered paper in Austria and L.C.I s.r.l. in Italy. ASD Altpapier Sortierung Dachau GmbH is a German recovered paper sorting company. The purchases from those four companies represented approximately 79% (81%) of total recovered paper purchase amount from associates and joint ventures.
Transactions with associates and joint ventures are presented in the table below. The group has no individually material associates or joint ventures.

EURm | 2016 | 2015
Dividends received | 3 | 1
Sales | – | 1
Purchases of raw materials and services | 90 | 89
Loan receivables | 9 | 9
Trade and other receivables | 1 | 1
Trade and other payables | 3 | 1

Subsidiaries and joint operations

• | Refer Note 8.2 Principal subsidiaries and joint operations.

Pension Funds
In Finland, group has the pension foundation, Kymin Eläkesäätiö, which is a separate legal entity. Pensions for about 10% of the group’s Finnish employees are arranged through the foundation.
In 2016, the contributions paid by UPM to the Foundation amounted to EUR 10 million (10 million). The Foundation manages and invests the contributions paid to the plan. The fair value of the Foundation’s assets at 31 December 2016 was EUR 347 million (357 million), of which 48% was in the form of equity instruments, 41% in the form of debt instruments and 11% was invested in property and money market.In the UK, the single UPM Pension Scheme operates under a Trust which is independent from the group. The Trust consists of various defined benefit sections, all of which are closed to future accrual and one common defined contribution section which is open to all UPM employees in the UK. The group made contributions of EUR 5 million (28 million) to the defined benefit sections of the Scheme in 2016. The fair value of the UK defined benefit fund assets at 31 December 2016 was EUR 426 million (409 million), of which 55% was invested in equity instruments, 28% in debt instruments, 9% in property and money market and 8% in other investments.
8.4 Assets held for sale
Assets classified as held for sale at the end of 2016 relate to hydro power assets located at the mill site in Madison Paper Industries in the US amounting to EUR 8 million. At the end of 2015, there were no assets classified as held for sale.
Accounting policies
Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to sell, if UPM will recover their carrying amount through a sale transaction which is considered highly probable. Non-current assets classified as held for sale, or included within a disposal group that is classified as held for sale, are not depreciated after the classification

9. | Unrecognised items

9.1 Commitments and contingencies
In the normal course of business, UPM enters into various agreements providing financial or performance assurance to third parties. The maximum amounts of future payments for which UPM is liable is disclosed in the table below under “Other commitments”. Property under mortgages given as collateral for own commitments include property, plant and equipment, industrial estates and forest land.

EURm | 2016 | 2015
On own behalf |  |
Mortgages | 151 | 220
On behalf of others |  |
Guarantees | 2 | 4
Other own commitments |  |
Operating leases, due within 12 months | 74 | 65
Operating leases, due after 12 months | 374 | 355
Other commitments | 154 | 180
Total | 755 | 824

In June 2013, UPM announced that it was participating in the share issue from Pohjolan Voima Oy to finance the Olkiluoto 3 nuclear power plant project. UPM’s commitment of the issue is EUR 119 million, of which EUR 93 million has been paid during the previous years. The remaining part of the share issue will be implemented in the coming years based on the financing needs of the project.
9.2 Litigation
Group companies
In 2011, Metsähallitus (a Finnish state enterprise, which administers state-owned land) filed a claim for damages against UPM and two other Finnish forest companies. The claim relates to the Finnish Market Court decision of 3 December 2009 whereby the defendants were deemed to have breached competition rules in the Finnish roundwood market. In addition to Metsähallitus, individuals and companies, as well as municipalities and parishes, have filed claims relating to the Market Court decision. The capital amount of all of the claims after the District Court rejected some claims and after certain claimants waived their claims totals currently EUR 185 million in the aggregate jointly and severally against UPM and two other companies; alternatively and individually against UPM, this represents EUR 32 million in the aggregate. In addition to the claims on capital amounts, the claimants are also requesting compensation relating to value added tax and interests. UPM considers all the claims unfounded in their entirety. No provision has been made in UPM’s accounts for any of these claims. On 22 June 2016 the District Court rendered a judgment whereby it rejected the damages claim of Metsähallitus against UPM, and the other two Finnish forest companies. The District Court ordered Metsähallitus to pay UPM compensation for legal expenses. The capital amount of Metsähallitus’ claim was in total EUR 159 million, of which EUR 23 million was based on agreements between Metsähallitus and UPM. Metsähallitus has appealed the District Court judgment to the Court of Appeal.
In 2012, UPM commenced arbitration proceedings against Metsäliitto Cooperative and Metsä Board Corporation due to their breaches of UPM’s tag-along right under the shareholders’ agreement concerning Metsä Fibre Oy in connection with the sale of shares in Metsä Fibre to Itochu Corporation. UPM claimed jointly from Metsäliitto and Metsä Board a capital amount of EUR 58.5 million. Metsäliitto and Metsä Board had sold a 24.9% holding in Metsä Fibre to Itochu Corporation for EUR 472 million. In connection with the transaction with Itochu, Metsäliitto had exercised a call option to purchase UPM’s remaining 11% shareholding in Metsä Fibre for EUR 150 million. The arbitral tribunal rendered its final decision (arbitral award) in February 2014 and ordered Metsäliitto and Metsä Board to pay UPM the capital amount of EUR 58.5 million and penalty interest and compensate UPM for its legal fees. As a result, UPM recorded an income of EUR 67 million as item affecting comparability in Q1 2014. In May 2014 Metsäliitto and Metsä Board commenced litigation proceedings in the Helsinki District Court challenging the arbitral award and requesting the District Court to set aside the arbitral award or to declare it null and void. In June 2015 the District Court rejected the actions by Metsäliitto and Metsä Board and following an appeal the Helsinki Court of Appeal rejected the actions by Metsäliitto and Metsä Board In October 2016. Metsäliitto and Metsä Board have filed a request for leave of appeal with the Supreme Court.
Other shareholdings
In Finland, UPM is participating in a project to construct a new nuclear power plant unit Olkiluoto 3 EPR (OL3 EPR) through its shareholdings in Pohjolan Voima Oy. Pohjolan Voima Oy is a majority shareholder of Teollisuuden Voima Oyj (TVO), holding 58.5% of its shares. UPM’s indirect share of OL3 is approximately 31%. Originally the commercial electricity production of the OL3 plant unit was scheduled to start in April 2009. The completion of the project, however, has been delayed. In September 2014 TVO announced that it had received additional information about the schedule for the OL3 EPR project from the Supp-lier consortium companies (AREVA GmbH, AREVA NP SAS and Sie-mens AG), which is constructing OL3 EPR as a fixed-price turnkey pro-ject. According to this information, the start of regular electricity production of the plant unit would take place in late 2018.
In December 2008 the Supplier initiated the International Chamber of Commerce (ICC) arbitration proceedings and submitted a claim concerning the delay at the OL3 EPR project and related costs. According to TVO, the Supplier’s monetary claim, as updated in February 2016, is in total approximately EUR 3.52 billion. The sum is based on the Supplier’s updated analysis of events occurred through September 2014, with certain claims quantified to December 31, 2014. The sum includes penalty interest (calculated to June 30, 2016) and payments allegedly delayed by TVO under the plant contract amounting to a combined total of approximately EUR 1.45 billion, as well as approximately EUR 135 million in alleged loss of profit.
According to TVO, the quantification estimate of its costs and losses related to its claim in the arbitration proceedings is approximately EUR 2.6 billion until the end of 2018, which is the estimated start of the regular electricity production of OL3 EPR according to the schedule submitted by the Supplier. TVO´s current estimate was submitted to the tribunal in the arbitration proceedings in July 2015.
According to TVO, TVO received a final and binding partial award in the arbitration proceeding In which the tribunal addressed the early period of the project (time schedule, licensing and licensability, and system design). This comprises many of the facts and matters that TVO relies upon in its main claims against the Supplier, as well as certain key matters that the Supplier relies upon in its claims against TVO. In doing so, the partial award has finally resolved the great majority of these facts and matters in favor of TVO, and conversely has rejected the great majority of the Supplier’s contentions in this regard. The partial award does not take a position on the claimed monetary amounts. The arbitration proceeding is still going on with further partial awards to come before the final award where the tribunal will declare the liabilities of the parties to pay compensation.
TVO considers its claims to be well-founded and has considered and found the claims of the Supplier to be without merit. According to TVO the partial award provides material confirmation for this position. The Supplier consortium companies are jointly and severally liable for the plant contract obligations. No receivables or provisions have been recorded by TVO on the basis of claims presented in the arbitration proceedings.
According to TVO, Areva Group announced in 2016 a restructuring of its business. The restructuring plan involves a transfer of the operations of Areva NP, excluding the OL3 EPR project and resources necessary for its completion, to a new company which is to be sold to a consortium led by EDF. According to Areva’s announcement, the consummation of the restructuring is expected to take place during the second half of 2017. The implementation of the restructuring plan is subject to decisions and clearances. TVO requires that the restructuring ensures that the OL3 EPR project will be completed within the current schedule and that all obligations under the plant contract are fulfilled. TVO has sought to obtain more detailed information from Areva Group on its announced restructuring and its impacts on the OL3 EPR project with a view to securing the assurances that all the necessary financial and other resources, particularly in relation to the EPR technology capabilities, will be allocated for the completion and long-term operation of OL3 EPR and that the Supplier Areva-Siemens will meet all their contractual obligations.
9.3 Events after the balance sheet date
The group’s management is not aware of any significant events occur-ring after 31 December 2016.

10. | Other notes

10.1 New standards and amendments – forthcoming requirements
As at 31 December 2016, the following standards and amendments relevant to group had been issued but were not mandatory for annual reporting periods ending 31 December 2016.
IFRS 15 Revenues from contracts with customers

|  | GROUP
STANDARD | NATURE OF CHANGE AND IMPACT | ADOPTION DATE
IFRS 15 Revenues from | IFRS 15 deals with revenue recognition and establishes principles for reporting useful | 1 January 2018
contracts with customers | information to users of financial statements about the nature, amount, timing and uncertainty |
| of revenue and cash flows arising from an entity’s contracts with customers. Revenue is |
| recognised when a customer obtains control of a good or service and thus has the ability to |
| direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 |
| Revenue and IAS 11 Construction contracts and related Interpretations. |
| Based on UPM’s assessment made, the group does not expect significant changes in the |
| measurement of revenue and timing of recognition. However, IFRS 15 will significantly |
| increase the volume of the revenue related disclosures, particularly in annual financial |
| statements. The group plans to adopt IFRS 15 retrospectively with the cumulative effect of |
| initially applying IFRS 15 recognised at the date of initial application 1 January 2018. The |
| group will start implementation phase in 2017. |

IFRS 9 Financial Instruments | IFRS 9 includes requirements for classification, measurement and recognition of financial | 1 January 2018
| assets and financial liabilities. IFRS 9 establishes three primary measurement categories for |
| financial assets: amortised cost, fair value through other comprehensive income and fair |
| value through profit or loss. The basis of classification depends on the entity’s business model |
| and the contractual cash flow characteristics of the financial asset. The group does not expect |
| material impact from the new classification and measurement rules on the group’s financial |
| statements. For equity investments currently classified as available-for-sale presentation of |
| changes in fair value in other comprehensive income is available also in new standard. |
| However, change in fair value is required to remain in other comprehensive income. |
| The new impairment model requires the recognition of impairment provisions based on |
| expected credit losses. The new model presented in IFRS 9 will most likely not cause a major |
| increase in credit loss allowances as it is similar with group current principles. |
| IFRS 9 relaxes the requirements for hedge effectiveness by removing the bright line of |
| 80-125 % and retrospective tests for assessing hedge effectiveness. It requires an economic |
| relationship between the hedged item and hedging instrument and for the hedged ratio to be |
| the same as the one management actually use for risk management purposes. The group is |
| currently assessing whether more hedge relationships might be eligible for hedge accounting. |
| The group does not intend to adopt IFRS 9 before its mandatory date. |
IFRS 16 Leases | IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure | 1 January 2019
| of leases. It will result in almost all leases being recognised on the balance sheet, as the |
| distinction between operating and finance leases is removed. Under the new standard, an |
| asset (the right to use the leased item) and a financial liability to pay rentals are recognised. |
| The only exceptions are short-term and low-value leases. |
| The group has started an assessment phase in 2016 to determine the impact of new |
| standard to group financial statements. At this stage, the group does not intend to adopt the |
| standard before its effective date 1 January 2019. |
Amendment to IFRS 2 | Amendment to IFRS 2 clarifies the classification and measurement of share-based payment | 1 January 2018
Share-based Payment | transactions. The group will make an assessment of possible impact during 2017. The |
| amendments are to be applied prospectively. |

10.2 Alternative performance measures
UPM presents certain performance measures of historical performance, financial position and cash flows, which in accordance with the “Alternative Performance Measures” guidance issued by the European Securities and Markets Authority (ESMA) are not accounting measures defined or specified in IFRS and are therefore considered as alternative performance measures. These alternative performance measures aredescribed below:

ALTERNATIVE PERFORMANCE MEASURE | DEFINITION
Operating profit | Profit before income tax expense, finance expenses and finance income and net gains on sale of energy
| shareholdings as presented on the face of the IFRS income statement.
Comparable EBIT | Operating profit adjusted for items affecting comparability.
Comparable EBITDA | Operating profit before depreciation, amortisation and impairments, change in fair value of forest assets
| and wood harvested, share of results of associates and joint ventures and items affecting comparability.
Comparable profit before tax | Profit before income tax expense excluding items affecting comparability.
Comparable profit for the period | Profit for the period excluding items affecting comparability and their tax impact.
Comparable EPS, EUR | Earnings per share calculated in accordance with IFRS excluding items affecting comparability and their
| tax impact.
Net debt | Total of current and non-current debt less cash and cash equivalents and interest-bearing current and
| non-current financial assets.
Items affecting comparability | Certain non-operational or non-cash valuation transactions with significant income statement impact are
| considered as items affecting comparability, if they arise from asset impairments, restructuring measures,
| asset sales, fair value changes of forest assets resulting from changes in valuation parameters or estimates
| or changes in legislation or legal proceedings. In addition, the changes in fair value of unrealised cash
| flow and commodity hedges are classified as items affecting comparability. Numerical threshold for items
| to be considered as significant in UPM’s business areas UPM Biorefining, UPM Specialty Papers and UPM
| Paper ENA is determined as one cent (EUR 0.01) after tax per share or more. In other business areas, the
| impact is considered to be significant if the item exceeds EUR 1 million before tax.
Free cash flow | Cash generated from operations after cash used for investing activities.
Return on equity (ROE), % | Profit for the period as a percentage of average equity.
Comparable ROE, % | Return on equity (ROE) excluding items affecting comparability.
Return on capital employed (ROCE), % | Profit before taxes, interest expenses and other financial expenses as a percentage of average capital
| employed.
Comparable ROCE, % | Return on capital employed (ROCE) excluding items affecting comparability.
Capital employed | Group total equity and total debt.
Business area’s comparable ROCE, % | Business area’s operating profit adjusted for items affecting comparability as a percentage of business
| area’s average capital employed.
Business area’s capital employed | Business area’s operating assets less its operating liabilities. Operating assets include goodwill, other
| intangible assets, property, plant and equipment, forest assets, energy shareholdings, investments in
| associates and joint-ventures, inventories and trade receivables. Operating liabilities include trade
| payables and advances received.
Capital expenditure | Capitalised investments in property, plant and equipment, intangible assets including goodwill arising
| from business combinations, energy shareholdings and other shares, associates and joint ventures.
Capital expenditure excluding acquisitions | Capital expenditure excluding investments in shares and participations.
and shares |
Operating cash flow per share, EUR | Operating cash flow divided by adjusted average number of shares during the period excluding treasury
| shares.
Gearing ratio, % | Net debt as a percentage of total equity
Net debt to EBITDA | Net debt divided by EBITDA
Equity to assets ratio, % | Equity expressed as a percentage of total assets less advances received.

Reconciliation of key figures to IFRS

EURm, OR AS INDICATED | Q4/16 | Q3/16 | Q2/16 | Q1/16 | Q4/15 | Q3/15 | Q2/15 | Q1/15 | Q1-Q4/16 | Q1-Q4/15
Items affecting comparability |  |  |  |  |  |  |  |  |  |
Impairment charges | –24 | – | 1 | –12 | – | –1 | 1 | – | –35 | –
Restructuring charges | –31 | – | – | –18 | –2 | 4 | –6 | –1 | –48 | –5
Change in fair value of unrealised cash flow and |  |  |  |  |  |  |  |  |  |
commodity hedges | 2 | 3 | –3 | 25 | –22 | 2 | 8 | –6 | 27 | –18
Capital gains and losses on sale of non-current |  |  |  |  |  |  |  |  |  |
assets | 2 | 47 | – | – | – | 3 | 3 | – | 49 | 6
Fair value changes of forest assets resulting from |  |  |  |  |  |  |  |  |  |
changes in estimates | – | – | – | – | – | 265 | – | – | – | 265
Other non-operational items | – | – | – | – | –3 | – | –19 | – | – | –22
Total items affecting comparability in operating |  |  |  |  |  |  |  |  |  |
profit | –51 | 50 | –2 | –4 | –27 | 273 | –13 | –7 | –7 | 226
Total items affecting comparability in financial |  |  |  |  |  |  |  |  |  |
items | – | –2 | – | – | – | – | – | – | –2 | –
Changes in tax rates | 4 | – | – | – | – | – | – | – | 4 | –
Taxes relating to items affecting comparability | 14 | –14 | – | 6 | 5 | –54 | 3 | 2 | 7 | –44
Items affecting comparability in taxes | 18 | –14 | – | 6 | 5 | –54 | 3 | 2 | 11 | –44
Items affecting comparability, total | –33 | 34 | –2 | 2 | –22 | 219 | –10 | –5 | 1 | 182
Comparable EBITDA |  |  |  |  |  |  |  |  |  |
Operating profit | 232 | 364 | 262 | 277 | 220 | 513 | 206 | 203 | 1,135 | 1,142
Depreciation, amortisation and impairment |  |  |  |  |  |  |  |  |  |
charges excluding items affecting comparability | 120 | 118 | 134 | 138 | 132 | 131 | 130 | 131 | 510 | 524
Change in fair value of forest assets and wood |  |  |  |  |  |  |  |  |  |
harvested excluding items affecting |  |  |  |  |  |  |  |  |  |
comparability | –53 | –7 | –11 | –16 | –16 | –24 | –31 | –16 | –88 | –87
Share of results of associates and joint ventures | –1 | –2 | –2 | – | – | –2 | –1 | – | –5 | –3
Items affecting comparability in operating profit | 51 | –50 | 2 | 4 | 27 | –273 | 13 | 7 | 7 | –226
Comparable EBITDA | 349 | 423 | 385 | 403 | 363 | 345 | 317 | 325 | 1,560 | 1,350
% of sales | 14.1 | 17.3 | 15.8 | 16.5 | 14.1 | 13.6 | 12.4 | 13.1 | 15.9 | 13.3
Comparable EBIT |  |  |  |  |  |  |  |  |  |
Operating profit | 232 | 364 | 262 | 277 | 220 | 513 | 206 | 203 | 1,135 | 1,142
Items affecting comparability in operating profit | 51 | –50 | 2 | 4 | 27 | –273 | 13 | 7 | 7 | –226
Comparable EBIT | 283 | 314 | 264 | 281 | 247 | 240 | 219 | 210 | 1,143 | 916
% of sales | 11.4 | 12.8 | 10.8 | 11.5 | 9.6 | 9.5 | 8.6 | 8.4 | 11.6 | 9.0
Comparable profit before tax |  |  |  |  |  |  |  |  |  |
Profit before tax | 231 | 336 | 250 | 263 | 214 | 498 | 182 | 181 | 1,080 | 1,075
Items affecting comparability in operating profit | 51 | –50 | 2 | 4 | 27 | –273 | 13 | 7 | 7 | –226
Items affecting comparability in financial items | – | 2 | – | – | – | – | – | – | 2 | –
Comparable profit before tax | 282 | 288 | 252 | 267 | 241 | 225 | 195 | 188 | 1,089 | 849
Comparable ROCE, % |  |  |  |  |  |  |  |  |  |
Comparable profit before tax | 282 | 288 | 252 | 267 | 241 | 225 | 195 | 188 | 1,089 | 849
Interest expenses and other financial expenses | 17 | 13 | 15 | 10 | 13 | 12 | 20 | 12 | 55 | 57
| 300 | 301 | 266 | 277 | 254 | 237 | 215 | 200 | 1,144 | 906
Capital employed, average | 10,560 | 10,433 | 11,701 | 11,005 | 11,079 | 11,080 | 11,059 | 11,025 | 10,833 | 10,977
Comparable ROCE, % | 11.4 | 11.5 | 10.0 | 10.1 | 9.2 | 8.6 | 7.8 | 7.3 | 10.6 | 8.3
Comparable profit for the period |  |  |  |  |  |  |  |  |  |
Profit for the period | 187 | 268 | 198 | 227 | 193 | 408 | 160 | 155 | 880 | 916
Items affecting comparability, total | 33 | –34 | 2 | –2 | 22 | –219 | 10 | 5 | –1 | –182
Comparable profit for the period | 220 | 234 | 200 | 225 | 215 | 189 | 170 | 160 | 879 | 734
Comparable EPS, EUR |  |  |  |  |  |  |  |  |  |
Comparable profit for the period | 220 | 234 | 200 | 225 | 215 | 189 | 170 | 160 | 879 | 734
Profit attributable to non-controlling interest | – | – | –1 | – | – | – | – | – | –1 | –
| 220 | 234 | 199 | 225 | 215 | 189 | 170 | 160 | 878 | 734
Average number of shares basic (1,000) | 533,505 | 533,505 | 533,505 | 533,505 | 533,505 | 533,505 | 533,505 | 533,505 | 533,505 | 533,505
Comparable EPS, EUR | 0.41 | 0.44 | 0.37 | 0.42 | 0.41 | 0.35 | 0.32 | 0.30 | 1.65 | 1.38
Comparable ROE, % |  |  |  |  |  |  |  |  |  |
Comparable profit for the period | 220 | 234 | 200 | 225 | 215 | 189 | 170 | 160 | 879 | 734
Profit attributable to non-controlling interest | – | – | –1 | – | – | – | – | – | –1 | –
| 220 | 234 | 199 | 225 | 215 | 189 | 170 | 160 | 878 | 734
Total equity, average | 8,054 | 7,767 | 7,819 | 7,959 | 7,944 | 7,788 | 7,718 | 7,642 | 8,091 | 7,712
Comparable ROE, % | 10.9 | 12.1 | 10.2 | 11.3 | 10.8 | 9.7 | 8.8 | 8.4 | 10.9 | 9.5

Quarterly key figures are unaudited
Parent company accounts
(Finnish Accounting Standards, FAS)
Income statement

EURm | NOTE | 2016 | 2015
Sales | 1 | 2,811 | 3,298
Change in inventories of finished goods and work in progress |  | – | 2
Production for own use |  | 3 | 4
Other operating income | 2 | 152 | 169
Materials and services | 3 | –1901 | –2,056
Personnel expenses | 4 | –343 | –445
Depreciation, amortisation and impairment charges | 5 | –172 | –220
Other operating expenses | 6 | –178 | –268
Operating profit |  | 373 | 484
Financial income and expenses | 7 | 6 | 168
Profit before closing entries and tax |  | 379 | 652
Closing entries | 8 | –42 | –46
Income taxes | 9 | –81 | –61
Profit for the period |  | 255 | 545

Balance sheet

EURm | NOTE | 2016 | 2015
ASSETS |  |  |
Intangible assets | 10 | 35 | 187
Tangible assets | 11 | 1,766 | 2,262
Holdings in group companies | 12 | 4,365 | 3,984
Holdings in participating interest companies | 12 | 5 | 93
Other shares and holdings | 12 | 4 | 614
Receivables from group companies | 12 | 255 | 723
Receivables from participating interest companies | 12 | 5 | 6
Other non-current receivables | 12 | 7 | 7
Non-current assets |  | 6,443 | 7,876
Inventories | 13 | 174 | 314
Trade receivables | 14 | 26 | 135
Receivables from group companies | 14 | 1,901 | 868
Receivables from participating interest companies | 14 | 12 | 11
Other current receivables | 14 | 102 | 203
Cash and cash equivalents |  | 908 | 477
Current assets |  | 3,122 | 2,008
Assets |  | 9,565 | 9,884
EURm | NOTE | 2016 | 2015
EQUITY AND LIABILITIES |  |  |
Share capital | 15 | 890 | 890
Revaluation reserve | 15 | 206 | 427
Reserve for invested non-restricted equity | 15 | 1,273 | 1,273
Retained earnings | 15 | 1,860 | 1,714
Profit for the period |  | 255 | 545
Equity |  | 4,483 | 4,849
Accumulated depreciation difference |  | 455 | 608
Provisions | 16 | 170 | 60
Bonds | 17 | 593 | 991
Loans from financial institutions | 17 | 568 | 911
Pension loans | 17 | 68 | 135
Other non-current liabilities | 17 | 170 | 161
Non-current liabilities |  | 1,399 | 2,198
Bonds | 18 | 292 | –
Loans from financial institutions | 18 | 3 | 13
Pension loans | 18 | 68 | 68
Trade payables | 18 | 211 | 300
Payables to group companies | 18 | 2,217 | 1,489
Payables to participating interest companies | 18 | 1 | 3
Other current liabilities | 18 | 266 | 296
Current liabilities |  | 3,058 | 2,169
Liabilities |  | 4,456 | 4,367
Equity and liabilities |  | 9,565 | 9,884

Cash flow statement

EURm | 2016 | 2015
Cash flow from operating activities |  |
Profit before closing entries and tax | 379 | 652
Financial income and expenses | –6 | –168
Adjustments to operating profit 1) | 42 | 66
Change in working capital 2) | –219 | 108
Interest received | 24 | 12
Interest paid | –52 | –60
Dividends received | 81 | 182
Other financial items | 9 | –25
Income taxes paid | –17 | –90
Operating cash flow | 241 | 677
Cash flow from investing activities |  |
Investments in tangible and intangible assets | –137 | –180
Acquisition of shareholdings | – | –69
Proceeds from sale of intangible and tangible assets | 130 | 135
Proceeds from disposal of shareholdings | 4 | 818
Change in other non-current receivables | 408 | –56
Investing cash flow | 405 | 648
Cash flow from financing activities |  |
Payments of non-current liabilities | –505 | –386
Change in current liabilities | 693 | –614
Dividends paid | –400 | –373
Group contributions, net | –2 | 61
Financing cash flow | –214 | –1,312
Change in cash and cash equivalents | 431 | 13
Cash and cash equivalents at the beginning of period | 477 | 464
Change in cash and cash equivalents | 431 | 13
Cash and cash equivalents at the end of period | 908 | 477
1) Adjustments to operating profit |  |
EURm | 2016 | 2015
Depreciation, amortisation and impairment charges | 172 | 220
Capital gains on sale of non-current assets, net | –124 | –146
Change in provisions | –7 | –8
Total | 42 | 66
2) Change in working capital |  |
EURm | 2016 | 2015
Inventories | 21 | 30
Current receivables | –361 | 27
Current non-interest-bearing liabilities | 121 | 51
Total | –219 | 108

Notes to the parent company financial statements
Accounting policies
The financial statements of the parent company are prepared in accordance with Finnish Accounting Standards, FAS.
The main differences in accounting policies of the group and the parent company relate to the measurement of forest assets and finan-cial derivatives and recognition of defined benefit obligations and deferred income taxes.
The financial statements are presented in millions of euros and rounded and therefore the sum of individual figures might deviate from the presented total figure.
Sales
Sales by business area

EURm | 2016 | 2015
UPM Biorefining | 1,560 | 1,555
UPM Energy | 135 | 376
UPM Specialty Papers | 240 | 488
UPM Paper ENA | 668 | 1,490
Other operations and eliminations | 208 | –611
Total | 2,811 | 3,298

Sales by destination

EURm | 2016 | 2015
Finland | 2,697 | 685
Other EU countries | 27 | 2,330
Other countries | 87 | 283
Total | 2,811 | 3,298

2. | Other operating income

EURm | 2016 | 2015
Gains on sale of non-current assets | 133 | 148
Rental income | 15 | 16
Other | 4 | 5
Total | 152 | 169

3. | Materials and services

EURm | 2016 | 2015
Raw materials and consumables | 1,888 | 1,992
Change in inventories | 9 | 26
Delivery costs and other external charges | 4 | 38
Total | 1,901 | 2,056

4. | Personnel expenses

Salaries, fees and other personnel expenses

EURm | 2016 | 2015
Salaries and fees to the President and CEO, |  |
and members of the Board of Directors 1) | 6 | 4
Other salaries and fees | 273 | 359
Pension costs | 47 | 64
Other indirect employee costs | 17 | 18
Total | 343 | 445

1) | Refer Note 3.2 Key management personnel.

Personnel

| 2016 | 2015 |
Total on average |  |  |
4,277 | 5,747 |

5. | Depreciation, amortisation and impairment charges

EURm | 2016 | 2015
Intangible rights | 3 | 2
Other intangible assets | 19 | 24
Buildings | 26 | 33
Machinery and equipment | 119 | 155
Other tangible assets | 6 | 6
Total | 172 | 220

6. | Other operating expenses

EURm | 2016 | 2015
Rents and lease expenses | 17 | 24
Losses on sale of non-current assets | 4 | 1
Maintenance expenses | 99 | 135
Other operating expenses 1) | 58 | 108
Total | 178 | 268

1) | The research and development costs in operating expenses were EUR 24 million (27 million) and auditor’s fee EUR 0.8 million (0.8 million).

7. | Financial income and expenses

EURm | 2016 | 2015
Income on non-current assets |  |
Dividend income from group companies | 80 | 182
Dividend income from other companies | 1 | –
Interest income from group companies | 3 | 6
| 84 | 188
Other interest and financial income |  |
Other interest income from group companies | 19 | 3
Other financial income from group companies | 35 | 29
Other financial income from other companies | 13 | –
| 68 | 32
Value adjustments | –6 | 105
Interest and other financial expenses |  |
Interest expenses to group companies | –22 | –34
Interest expenses to other companies | –29 | –26
Other financial expenses to other companies | –90 | –97
| –141 | –157
Total | 6 | 168

8. Closing entries

EURm |  | 2016 | 2015
Change in accumulated depreciation |  |
difference |  | 11 | 44
Group contributions received | –1 | –4
Group contributions granted | 32 | 6
Losses from mergers | 1 | –
Total |  | 42 | 46

9. Income taxes

EURm |  | 2016 | 2015
Tax expense for the period | 82 | 61
Tax expense for the previous periods | –1 | –
Total |  | 81 | 61
Deferred tax assets and liabilities 1) |  |
EURm |  | 2016 | 2015
Deferred tax assets |  |
Provisions |  | 34 | 12
Share-based payments | 3 | 2
Other temporary differences | – | 1
Total |  | 37 | 15
Deferred tax liabilities |  |
Accumulated depreciation difference | –91 | –122
Revaluations of the land areas | –73 | –117
Total |  | –164 | –239

1) | The parent company has not recognised deferred tax assets and liabilities in the balance sheet. Deferred tax assets and liabilities were calculated based on temporary differences between the carrying and taxable values of assets and liabilities.

10. Intangible assets

|  |  | OTHER |  |
|  | INTANGIBLE | INTANGIBLE | ADVANCE |
EURm |  | RIGHTS | ASSETS | PAYMENTS | TOTAL
2016 |  |  |  |  |
Accumulated costs | 13 | 282 | 5 | 300
Accumulated amortisation and impairments | –8 | –257 | – | –265
Carrying value, at 31 December | 5 | 25 | 5 | 35
Carrying value, at 1 January | 5 | 178 | 4 | 187
Additions |  | 6 | 4 | 3 | 13
Disposals |  | –3 | –141 | – | –144
Amortisation | –3 | –17 | – | –19
Impairment | – | –2 | – | –2
Reclassifications | – | 2 | –2 | –
Carrying value, at 31 December | 5 | 25 | 5 | 35
2015 |  |  |  |  |
Accumulated costs | 19 | 523 | 4 | 546
Accumulated amortisation and impairments | –14 | –345 | – | –359
Carrying value, at 31 December | 5 | 178 | 4 | 187
Carrying value, at 1 January | 5 | 198 | 3 | 206
Additions |  | 7 | 4 | 3 | 14
Disposals |  | –5 | –1 | –1 | –7
Amortisation | –2 | –24 | – | –26
Reclassifications | – | 1 | –1 | –
Carrying value, at 31 December | 5 | 178 | 4 | 187

11. Tangible assets

|  |  |  |  |  | ADVANCE |
|  |  |  |  |  | PAYMENTS |
|  |  |  |  |  | AND CON |
|  | LAND AND |  | MACHINERY | OTHER | STRUCTION |
|  | WATER |  | AND | TANGIBLE | IN |
EURm |  | AREAS | BUILDINGS | EQUIPMENT | ASSETS | PROGRESS | TOTAL
2016 |  |  |  |  |  |  |
Accumulated costs | 449 | 604 | 2,026 | 138 | 36 | 3,254
Accumulated depreciation and impairments | – | –345 | –1,396 | –112 | – | –1,852
Revaluations | 364 | – | – | – | – | 364
Carrying value, at 31 December | 813 | 259 | 630 | 27 | 36 | 1,766
Carrying value, at 1 January | 891 | 443 | 868 | 37 | 23 | 2,262
Additions |  | 8 | 25 | 117 | 2 | 61 | 213
Disposals |  | –29 | –186 | –270 | –8 | –7 | –499
Depreciations | – | –27 | –120 | –6 | – | –152
Impairment | – | – | 1 | – | – | 1
Reclassifications | – | 3 | 35 | 2 | –41 | –
Changes in revaluations | –57 | – | – | – | – | –57
Carrying value, at 31 December | 813 | 259 | 630 | 27 | 36 | 1,766
2015 |  |  |  |  |  |  |
Accumulated costs | 470 | 1,242 | 5,027 | 198 | 23 | 6,960
Accumulated depreciation and impairments | – | –799 | –4,159 | –161 | − | –5,119
Revaluations | 421 | – | – | – | – | 421
Carrying value, at 31 December | 891 | 443 | 868 | 37 | 23 | 2,262
Carrying value, at 1 January | 934 | 441 | 720 | 38 | 209 | 2,342
Additions |  | 8 | 12 | 64 | 3 | 78 | 165
Disposals |  | –15 | – | – | − | − | –15
Depreciations | − | –33 | –155 | –6 | − | –194
Reclassifications | – | 23 | 239 | 2 | –264 | –
Changes in revaluations | –36 | – | – | – | – | –36
Carrying value, at 31 December | 891 | 443 | 868 | 37 | 23 | 2,262

12. | Other non-current assets

|  |  |  |  | RECEIVABLES |  |
|  | HOLDINGS IN |  | RECEIVABLES | FROM | OTHER |
| HOLDINGS | PARTICIPATING | OTHER | FROM | PARTICIPATING | NON- |
| IN GROUP | INTEREST | SHARES AND | GROUP | INTEREST | CURRENT |
EURm | COMPANIES | COMPANIES | HOLDINGS | COMPANIES | COMPANIES | RECEIVABLES | TOTAL
2016 |  |  |  |  |  |  |
Accumulated costs | 5,780 | 5 | 4 | 255 | 5 | 7 | 6,056
Accumulated value adjustments | –1,414 | – | – | – | – | – | –1,414
Carrying value, at 31 December | 4,365 | 5 | 4 | 255 | 5 | 7 | 4,642
Carrying value, at 1 January | 3,984 | 93 | 614 | 723 | 6 | 7 | 5,427
Additions | 829 | 1 | – | 3 | – | – | 832
Disposals | –442 | –88 | –446 | –470 | –1 | – | –1,448
Changes in revaluations | – | – | –164 | – | – | – | –164
Value adjustments 1) | –5 | – | –1 | – | – | – | –6
Carrying value, at 31 December | 4,365 | 5 | 4 | 255 | 5 | 7 | 4,642
2015 |  |  |  |  |  |  |
Accumulated costs | 5,393 | 93 | 450 | 723 | 6 | 7 | 6,672
Accumulated value adjustments | –1,409 | – | – | – | – | − | –1,409
Revaluations | – | – | 164 | – | – | – | 164
Carrying value, at 31 December | 3,984 | 93 | 614 | 723 | 6 | 7 | 5,427
Carrying value, at 1 January | 4,648 | 99 | 582 | 666 | 6 | 30 | 6,031
Additions | 37 | – | 32 | 69 | – | – | 138
Disposals | –806 | –6 | – | –12 | – | −21 | –845
Reclassifications | – | – | – | – | – | –2 | –2
Value adjustments | 105 | – | – | – | – | – | 105
Carrying value, at 31 December | 3,984 | 93 | 614 | 723 | 6 | 7 | 5,427

1) | Value adjustments are recognised under financial items.

13. Inventories

EURm | 2016 | 2015
Raw materials and consumables | 132 | 203
Finished products and goods | 22 | 80
Advance payments | 19 | 31
Carrying value, at 31 December | 174 | 314

14. | Current receivables

|  |  | RECEIVABLES
|  | RECEIVABLES | FROM
|  | FROM | PARTICIPATING
|  | GROUP | INTEREST
EURm | TOTAL | COMPANIES | COMPANIES
2016 |  |  |
Trade receivables | 437 | 400 | 11
Loan receivables 1) | 1,495 | 1,495 | –
Prepayments and accrued |  |  |
income | 66 | – | –
Other current receivables | 42 | 5 | –
Carrying value, |  |  |
at 31 December | 2,040 | 1,901 | 12
2015 |  |  |
Trade receivables | 228 | 83 | 10
Loan receivables | 783 | 783 | –
Prepayments and accrued |  |  |
income | 124 | 2 | 1
Other current receivables | 82 | – | –
Carrying value, |  |  |
at 31 December | 1,217 | 868 | 11

1) | There were no loans granted to the company’s President and CEO and members of the Board of Directors at 31 December 2016 and 2015.

EURm | 2016 | 2015
Prepayments and accrued income |  |
Energy taxes | 21 | 38
Personnel expenses | 2 | 4
Interest income | 33 | 39
Derivative financial instruments | 7 | 4
Income taxes | – | 37
Other items | 4 | 2
Carrying value, at 31 December | 66 | 124

15. Equity

|  |  |  |  |  |  | RESERVE FOR |  | TOTAL
|  |  |  |  |  | REVALUATION | INVESTED NON- | RETAINED | SHAREHOLDER’S
| EURm |  | SHARE CAPITAL | RESERVE | RESTRICTED EQUITY | EARNINGS | EQUITY
| Carrying value, at 1 January 2016 |  | 890 | 427 | 1,273 | 2,259 | 4,849
| Profit for period |  | – | – | – | 255 | 255
| Dividend distribution |  | – | – | – | –400 | –400
| Changes in revaluations |  | – | –221 | – | – | –221
| Carrying value, at 31 December 2016 |  | 890 | 206 | 1,273 | 2,115 | 4,483
| Carrying value, at 1 January 2015 |  | 890 | 463 | 1,273 | 2,088 | 4,714
| Profit for period |  | – | – | – | 545 | 545
| Dividend distribution |  | – | – | – | –373 | –373
| Changes in revaluations |  | – | –36 | – | – | –36
| Other changes |  | – | – | – | –1 | –1
| Carrying value, at 31 December 2015 |  | 890 | 427 | 1,273 | 2,259 | 4,849
| EURm |  | 2016 | 2015 |  |  |  |
| Distributable funds |  |  |  |  |  |  |
| Reserve for invested non-restricted equity | 1,273 | 1,273 |  |  |  |
| Retained earnings from previous years | 1,860 | 1,715 |  |  |  |
| Profit for the period | 255 | 545 |  |  |  |
| Total distributable funds at 31 December | 3,388 | 3,533 |  |  |  |

16. Provisions

EURm |  | RESTRUCTURING | TERMINATION | ENVIRONMENTAL | OTHER 1) | TOTAL
Provisions at 1 January 2016 | 15 | 13 | 12 | 20 | 60
Provisions made during the year | – | 1 | – | 154 | 155
Provisions utilised during the year | –2 | –2 | – | –3 | –7
Unused provisions reversed | – | – | – | –1 | –2
Changes due to restructurings | –10 | –6 | –2 | –17 | –35
Carrying value, at 31 December 2016 | 3 | 5 | 9 | 153 | 170
Provisions at 1 January 2015 | 17 | 17 | 13 | 21 | 68
Provisions made during the year | – | 3 | – | 3 | 6
Provisions utilised during the year | –2 | –6 | –1 | –3 | –12
Unused provisions reversed | – | –1 | – | –1 | –2
Carrying value, at 31 December 2015 | 15 | 13 | 12 | 20 | 60

1) | Other provisions are attributable to onerous contracts and fair value losses of financial derivatives. At the end of 2016 the fair value loss in other provisions of EUR 11 million was attributable to one group internal cross currency swap with nominal value of EUR 104 million and maturity in 2027.

Changes in provisions are recognised in in personnel or other operating expenses, in sales, materials or financial items.

17. | Non-current liabilities

EURm | 2016 | 2015
Bonds | 593 | 991
Loans from financial institutions | 568 | 911
Pension loans | 68 | 135
Other non-current liabilities | 170 | 161
Carrying value, at 31 December | 1,399 | 2,198

Maturity in 2022 or later (in 2021 or later)

EURm | 2016 | 2015
Bonds | 356 | 421
Other non-current liabilities | 170 | 160
Total | 526 | 581

Bonds

|  |  | NOMINAL | CARRYING | CARRYING
| INTEREST RATE, |  | VALUE ISSUED, | VALUE, 2016 | VALUE, 2015
FIXED RATE PERIOD | % | CURRENCY | MILLION | EURm | EURm
1997–2027 | 7.450 | USD | 375 | 356 | 344
2000–2016 | 3.550 | JPY | 10,000 | – | 76
2002–2017 | 6.625 | GBP | 250 | 292 | 341
2003–2018 | 5.500 | USD | 250 | 237 | 230
Carrying value, at 31 December |  |  |  | 885 | 991
Current portion |  |  |  | 292 | –
Non-current portion |  |  |  | 593 | 991

18. Current liabilities

|  |  | PAYABLES TO
|  | PAYABLES TO | PARTICIPATING
|  | GROUP | INTEREST
EURm | TOTAL | COMPANIES | COMPANIES
2016 |  |  |
Bonds | 292 | – | –
Loans from financial institutions | 3 | – | –
Pension loans | 68 | – | –
Trade payables | 252 | 40 | 1
Accruals and deferred income | 233 | 16 | –
Other current liabilities | 2,210 | 2,161 | –
Carrying value, at 31 December | 3,058 | 2,217 | 1
2015 |  |  |
Loans from financial institutions | 13 | – | –
Pension loans | 68 | – | –
Advances received | 1 | – | –
Trade payables | 353 | 51 | 2
Accruals and deferred income | 260 | 20 | –
Other current liabilities | 1,474 | 1,418 | 1
Carrying value, at 31 December | 2,169 | 1,489 | 3

EURm | 2016 | 2015
Accruals and deferred income |  |
Personnel expenses | 78 | 116
Interest expenses | 32 | 36
Derivative financial instruments | 120 | 97
Customer rebates |  | 8
Income taxes | 1 |
Other items | 1 | 3
Carrying value, at 31 December | 233 | 260

19. Commitments